Nonprofit Accounting Systems – Federal Grant Requirements

Adeq Acct Sys for Nonprofits w Fed Grants

The Uniform Guidance outlines the requirements for financial reporting systems of nonprofit organizations across several subsections.  However, the requirements included in those subsections can be vague. The following is intended to provide clarity and advice on accounting system selection and design for Federal Award recipients. 

The Uniform Guidance includes the following requirements for financial reporting systems:

  1.  Identification of Federal awards received and expended and the Federal programs under which the awards were received. This first part of the requirement facilitates the preparation of the Schedule of Expenditures of Federal Awards (SEFA). The organization may be subject to a Single Audit if annual expenditures under Federal awards exceed $750,000, or a program audit, if required by the grant or cooperative agreement. The important take away is that the accounting system must identify whether a project is a Federal award and identify the CFDA numbers. This can be accomplished several ways within an accounting system including, the use of prefixes or suffixes in the chart of accounts; memo entries in a project ledger; or “tagging” in certain cloud based systems. Offline spreadsheets may be necessary if the accounting system does not have a project module to capture such information.
  2.  Accurate, current, and complete disclosure of the financial results of each Federal Award or Program.   This requirement addresses the processes by which Federal award recipients capture data and ensure its accuracy more so than the ability of the accounting system to store and report data.  It is important note that the accounting system does not have to maintained on the accrual basis so long as the financial data can be converted to the accrual basis for purposes of interim and year-end reporting.  However, we would recommend maintaining the system on the accrual basis.
  3.  Records that adequately identify the source and application of funds for federally-funded activities. The establishment of a project based accounting system will satisfy this requirement.  If, however, your accounting system only includes a general ledger, then the chart of accounts will need to identify individual projects to include natural project expense accounts.
  4.  Effective internal controls for safeguarding assets, property, and Federal funds. Obviously, this requirement speaks to policies and procedures.  A basic set of policies and procedures covering the disbursement of Federal funds is a necessity, as well as maintaining an asset tracking system for property acquired with Federal funds.
  5.  The ability to compare budgeted to actual expenses for each Federal award.  This requirement is best accomplished using a project based accounting system.  However, if your accounting system does not contain a project module, such data must still be able to be aggregated and reported.  In this instance, offline spreadsheets may be the easiest way to monitor.
  6.  Written procedures to minimize the amount of time between the drawdown and expenditure of Federal funds and;
  7.  Written procedures for determining the allowability of costs. For items six and seven, the critical word is that the procedures must be written.  Failure to maintain written procedures will likely result in findings to be reported within your Single Audit Report.

Unfortunately, the above seven items represent all guidance included in the Uniform Guidance on the requirements for financial reporting systems.  Given these requirements, we would recommend that Federal award recipients review Standard Form 1408. This form is an accounting system adequacy checklist for Federal government contractors. The form identifies the basic requirements, including the ability to segregate direct, indirect, and unallowable costs within the general ledger and the ability to separately accumulate costs by project.  If your accounting system is designed to meet these requirements, your accounting system should be adequate for Federal award purposes. Don’t forget, however, those required written policies.

Please free to give us a call if you need help designing an adequate accounting system or to learn more about outsourcing your complete accounting function.