By Alex Brennan, CPA – Audit Manager, Financial Institutions Group

The U.S. Department of Treasury’s Community Development Financial Institutions (CDFI) fund was created in 1994 to promote economic revitalization and community development through investment in, and assistance to, qualifying CDFI credit unions that provide loans, investments, financial services and technical assistance to underserved populations and communities. Whether your financial institution already qualifies as a CDFI or is looking to become one, receiving a grant award through the fund requires additional administrative and compliance requirements. 

Doeren Mayhew’s credit union pros offer the following five tips for credit unions to comply with grant administrative and performance requirements, help prepare for a potential single audit and avoid audit findings.

1. Prepare and review the entire grant application and agreement.

The grant application submitted to the CDFI fund will include the credit union’s organizational and financial information, the purpose for the grant application and how the grant funds will be used. The grant application should be reviewed in its entirety, as it will contain important information relating to the purpose of the grant and intended use of the awards. The grant agreement should be read in its entirety as well. Key provisions of both documents should be summarized to include what the funds can and cannot be used for, the performance goals, plus identify and summarize the financial condition reporting and performance reporting requirements, due dates and how the reports will be submitted. Typically, grant informational and performance reports are submitted via the Awards Management Information System (AMIS), administered by the General Services Administration.

2. Implement effective internal controls over federal awards.

Effective controls over grant administration, compliance monitoring, reporting and accounting are critical. The following are examples that should be considered: 

• Review the applications and agreements in their entirety and summarize key provisions (as discussed above).
• Evaluate financial management controls by identifying all federal awards received and expended under the federal program. Ensure accurate, current and complete disclosure of the financial results of each federal award, maintain records identifying the amount, source and expenditure of federal funds, and compare actual expenditures to budgeted amounts.
• Assess the use of the award. The grant agreement will identify the specific activities CDFIs can undertake utilizing grant funds. The authorized financial activities, or “expenditures”, (financial products, loan loss reserves, capital reserves, direct administrative expenses, etc.) and restrictions on the use of the award should be documented and monitored. Confirm expenditures do not fall below minimum or exceed maximum thresholds outlined in the grant agreement.
• Review and monitor the performance goals outlined in the grant. A performance goal in a CDFI grant is a specific, measurable target the CDFI is required to meet during the grant's period of performance. These goals, based on the grant application, validate that grant funds are used to create measurable community development outcomes in low-income and underserved communities. Typically, the performance goal is related to financial product volume, mainly loans, to be made in eligible target markets by specific deadlines. 

All required reports outlined in the grant agreement must be submitted on time. Reported data—including loan information, award usage and performance metrics—should be thoroughly reconciled with the underlying source documentation. To ensure accuracy and integrity, an independent reviewer should validate the reports submitted to AMIS align with the supporting records.

3. Establish policies and procedures.

Many CDFI grant agreements incorporate 2 CFR Part 200 Uniform Administrative Requirements, Cost Principles and Audit Requirement for Federal Awards. Subpart D, Post Federal Award Requirements, establish uniform guidance (UG) administrative requirements. UG administrative requirements puts emphasis on written policies and procedures as central in its objective to maintain effective internal controls over federal awards. CDFIs should adopt policies and procedures as outlined in the UG administrative requirements.

4. Account for the grant funds appropriately. 

Generally, for entities other than nonprofit organizations, conditional grant funds are recognized as revenue (as other income or a reduction of the related expense) when there is reasonable assurance that a CDFI will comply with the conditions of the grant. This concept falls under International Accounting Standard (IAS) 20, commonly used as the basis for grant accounting. Currently, there is no direct guidance under generally accepted accounting principles. The Financial Accounting Standards Board (FASB) is expected to issue grant accounting guidance by the end of 2025. This guidance is anticipated to adopt similar revenue recognition concepts outlined in IAS 20. 

If permitted by the grant agreement, Doeren Mayhew recommends recognizing grant revenue directly as other income verses allocating as expense offsets or for loan loss reserves, if the criteria for revenue recognition are met as outlined above. Recognizing grant revenue as other income, in effect directly increasing capital reserves, simplifies grant reporting, the related accounting and significantly reduces the risk of noncompliance with the grant.

5. Prepare for a single audit.

If your credit union expends $1 million or more in federal awards during a fiscal year (beginning on or after Oct. 1, 2024), it will be subject to a single audit. This audit may be conducted alongside the annual financial statement audit, but includes additional procedures. These procedures involve reviewing the accounting treatment of grant revenues and expenses, as well as testing internal controls and compliance related to federal awards. Furthermore, expanded reporting is required under Government Auditing Standards and the Uniform Guidance, including a Schedule of Expenditures of Federal Awards, which must be attached to the audited financial statements. If any internal control or compliance issues are identified during the audit, additional reporting requirements will apply.

Staying proactive is key to avoiding issues and considerations of noncompliance that can arise during a single audit. Your institution may want to consider partnering with a qualified third party to review your grant compliance and administrative procedures, as well as evaluate the accounting for grant revenue and expenditures. Rely on Doeren Mayhew’s credit union pros to help position your credit union for a successful next audit.