Form 990 Reconciliation to Audited Financial Statements: Schedule D Parts XI and XII

A nonprofit with an audit produces two sets of numbers each year: the audited statement of activities under ASC 958 and the revenue and expense figures on its Form 990. They rarely match line for line, because the two documents follow different rules. The IRS does not ask the organization to make them match. It asks the organization to show why they differ. That showing is Schedule D, Parts XI and XII, and the audit team is well placed to build it.

Who completes Parts XI and XII

The Schedule D instructions tie the requirement to the organization's answers on Form 990, Part IV, lines 12a and 12b. The instructions say:

• If the organization answered "Yes" on Part IV, line 12a, it completes Parts XI and XII.
• If it answered "Yes" on line 12b, but "No" on line 12a, completing Parts XI and XII is optional.
• If the organization did not receive audited financial statements for the reporting year, it is not required to complete Part XI or XII, even if it prepared Form 990 in accordance with FASB ASC 958.
• Parts XI and XII do not have to be completed for group returns.

The point for the engagement letter is that the reconciliation is the organization's schedule, completed by its preparer. The audit firm supports it only if the engagement says so. See the engagement letter guide.

What the reconciliation reconciles

The instructions describe the purpose directly. Parts XI and XII reconcile the differences between the revenue and expenses reported on the audited financial statements, prepared in accordance with FASB ASC 958, and the revenue and expenses reported on Form 990. Part XI covers revenue and Part XII covers expenses. Each starts from the audited total and works to the Form 990 total, with lines for items that differ and for other adjustments.

Two specific instructions matter to the preparer:

• Investment expenses. On line 4a of each part, include only those investment expenses netted against investment income in the revenue portion of the audited financial statements. Do not include program-related investment expenses or other expenses reported as program service expenses in the audited statement of activities.
• Explanations in Part XIII. Where the reconciliation uses the "other" lines (Part XI lines 2d and 4b, and Part XII lines 2d and 4b), the organization describes those items in Part XIII, identifying the part and line number.

The result is a bridge with a narrative.

Why the numbers differ

The instructions do not list every cause, and this guide does not claim a complete list. The audit file should record each difference the firm finds between the statement of activities and the return, with a reason and a source. Common categories to look for include presentation choices on the return, netting of investment income and expense, and amounts the audited statements classify differently from the return.

A worked reconciliation

Marlow Community Services has audited total revenue of $4,812,000 under ASC 958 and expenses of $4,630,000. The Form 990 preparer asks the audit manager for the reconciliation support.

Revenue side.

Expense side.

The audited statements net $38,000 of custodian and adviser fees against investment income. The return reports revenue gross and the fees as expenses, so revenue and expenses each rise by $38,000 and revenue less expenses is unchanged. Other items do not offset this way. Net unrealized gains on investments go on Part XI line 2a: they are in audited revenue but not in Form 990 revenue, so the return's revenue less expenses differs from the audited change in net assets by that amount. The audit manager lists every such item so the difference is fully explained.

The $38,000 qualifies for line 4a because it was netted against investment income in the audited revenue. A $22,000 fee for managing a program-related investment, reported in the audited statement as a program service expense, does not belong on line 4a under the instructions.

Building the reconciliation as a workpaper

1. Start from the audited trial balance. Use the adjusted trial balance after audit adjustments. A reconciliation from the pre-audit books will not tie.
2. Map accounts to the return. Assign each revenue and expense account to a Form 990 category, and keep the mapping in the file.
3. List differences, one by one. Each gets a description, an amount, a source and the Schedule D line it lands on.
4. Prove the net-asset tie. The change in net assets per the audited statements equals the change per the return, or the file explains the difference.
5. Check Part XIII. Every line 2d or 4b amount has a narrative citing the part and line number.
6. Tie to the Part IV answers. Confirm that the organization's answers to lines 12a and 12b agree with the engagement, since they decide whether the parts are required.

Related uncertain tax position and other-liability disclosures in Schedule D Part X, which asks for the text of the financial statement note on liability for uncertain tax positions, should be checked at the same time. For unrelated business income issues that feed the same note, see Form 990-T and unrelated business income for auditors.

Related reading

For the audit-side net asset rules, see ASC 958-205 net asset releases and liquidity and nonprofit financial statements under ASC 958.

Where CORAA fits

CORAA prepares ready-to-review audit files for US CPA firms, including account-to-return mappings and tie-outs. The firm keeps the client, the review and the signature. See /us.

Sources

• IRS, Instructions for Schedule D (Form 990), Rev. December 2024: https://www.irs.gov/pub/irs-pdf/i990sd.pdf

AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error