Subject: Revenue Loss Due to Government Contract Cancellation
Hello Everyone,
I hope this message finds you well.
I am reaching out regarding a recent development at our international NGO. We’ve had our contract with USAID cancelled, which, while not significantly impacting our overall revenue (as government funding constitutes a small portion of our budget), does require us to address a revenue loss on our financial statements.
I see three potential approaches to report this loss, but I could use your guidance on the best path forward:
- Adjust the 2024 revenue figures.
- Include a footnote in the 2024 Audit and incorporate the adjustment in 2025.
- Make the adjustment in 2025 without a footnote in the 2024 Audit, given that the loss represents less than 5% of our total revenue.
Here are some specifics to consider:
- The revenue loss from the USAID contract amounts to 4.75% of our 2024 revenue (for context regarding materiality).
- Most revenue was recognized in 2023, with a small portion in 2024, as we had cleared all barriers to recognition. The prolonged timelines for completing the work have led us to this issue still being open as we move into 2025.
- The 2024 financials have already been presented to the board, so I suspect the C-suite might prefer to avoid adjustments to 2024 if possible.
The cancelled contract pertains to cash that the US government was to provide as work progressed.
I appreciate any insights or recommendations you can offer.
Thank you so much!
One response
Hello,
I’m sorry to hear about the cancellation of your USAID contract. Navigating revenue recognition in such situations can be challenging, especially when considering how it will affect your financial reporting. Here are some thoughts on your options:
Adjust 2024 Revenue: While this would provide a clear and accurate picture of your financials, since the 2024 financials have already been presented to the board, it could create discrepancies and might not be well received by the C-Suite. Transparency is important, but this option may not be the most practical at this stage.
Footnote on the 2024 Audit: This option provides a way to acknowledge the change in circumstances without adjusting the revenue figures. A footnote explaining the cancelled contract and its impact on anticipated revenue would be a transparent way of informing stakeholders. It allows you to maintain the integrity of the already presented financials while still preparing for necessary adjustments in the future.
Make the Adjustment in 2025 Without Footnote: Since the revenue loss is less than 5% of your total revenue, technically, you might have the discretion to make the adjustment in 2025 without a footnote. However, keep in mind that this approach may lack transparency and could raise questions later on, especially if stakeholders seek to understand the sources of revenue changes.
Considering the circumstances you outlined, I would lean towards Option 2—adding a footnote in the 2024 Audit. This approach strikes a good balance between transparency and practicality. It keeps your financial reporting clear while accommodating the preferences of your C-Suite and board.
Ultimately, your decision might also depend on advice from your finance team or auditors, so it may be helpful to consult with them before making a final call.
Good luck with your decision, and feel free to reach out if you need further clarification or assistance!
Best regards.