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Understanding Non-Profit Financial Statements for the Non-Financial Professional

Julie L. Jones Accounting Managed Services Partner April 30, 2015

AGENDA

OVERVIEW OF NONPROFIT ORGANIZATIONS DEFINITION OF A NONPROFIT ORGANIZATION PRESSURES UNIQUE TO NONPROFIT ORGANIZATIONS BOARD GOVERNANCE/RESPONSIBILITIES SYSTEMS THAT PROTECT NONPROFIT ORGANIZATIONS PRINCIPAL FINANCIAL DOCUMENTS BUDGET PREPARATION FINANCIAL STATEMENTS

• Statement of Financial Position • Statement of Activities • Statement of Cash Flows • Statement of Functional Expenses • Footnotes to Financial Statements • Compilation, Review and Attestation Reports

RESOURCES

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DEFINITION OF A NONPROFIT ORGANIZATION

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AN ENTITY THAT POSSESSES THE FOLLOWING CHARACTERISTICS AS DEFINED BY ASC 958 (FORMERLY FASB 116):

• Contributions of significant amounts of resources from resource providers who do not expect commensurate return

• Intends to operate at break-even or better over the life of the organization

• Operating purposes other than to provide goods or services at a profit

• Absence of ownership interest like those of a business enterprise

• Existence depends upon private and public support

TYPES OF NONPROFIT ORGANIZATIONS

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PRESSURES UNIQUE TO NONPROFIT ORGANIZATIONS

• Comply with federal and state regulations • Maintain an acceptable balance between

unrestricted contributions and temporarily and permanently restricted contributions

• Developing new revenue sources • Public scrutiny • Efficiency (program expenses vs. administrative

and fund raising) • Integrity • Public tax return (990) – www.guidestar.org

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BOARD GOVERNANCE

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• Nonprofit Organizations (NPOs) must have a governing body overseeing affairs of organization

• All states require NPOs incorporated in their state to have a board of directors

• IRS Form 990 contains a series of questions concerning the board and its governance practice

• Bears the primary responsibilities for ensuring that organizations fulfills it obligations to the law, its members, it donors, its staff and the public

• Mission, strategic directions and broad policies are set by the board in conjunction with the CEO and senior staff

• Must protect the assets of the organization and provide oversight to ensure its financial, human and material resources are used appropriately to further the organization’s mission

BOARD MEMBER RESPONSIBILITIES

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• Display loyalty and exercise prudence

• Act in good faith and be responsible

• Keep informed in order to make appropriate decisions

• Monitor the organization’s financial health

• Ensure the appropriate checks and balances are in place

• Monitor the organization’s risk management

• Avoid micro-management- be governors, not managers

FINANCIAL OVERSIGHT RESPONSIBILITIES

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SOUND FINANCIAL MANAGEMENT IS AMONG THE MOST IMPORTANT RESPONSIBILITIES OF THE BOARD

FINANCIAL OVERSIGHT RESPONSIBILITIES: • Review and approve annual budget • Review timely financial reports at least quarterly • Monitor actual financial results against approved

budget • Oversee annual audit process and review audited

financial statements • Review Form 990

FINANCIAL OVERSIGHT RESPONSIBILITIES

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ENSURE CURRENT WRITTEN FINANCIAL POLICIES EXIST AND STAFF ARE ADHERING TO THE BOARD APPROVED POLICIES

ENSURE ADEQUATE INTERNAL CONTROLS ARE IN PLACE TO DETER AND DETECT FRAUD AND MISAPPROPRIATION OF ASSETS AND FINANCIAL REPORTS

•Separation of duties – no one person should perform duties of receiving, depositing, and spending its funds

•Physical security of assets

SYSTEMS THAT PROTECT NPOS

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INTERNAL CONTROLS

• Goal = protection of assets and deter fraud

ACCOUNTING POLICIES AND PROCEDURES

• Accounting manual

• Investment policies

• Reserve/board designated endowment policies

EXTERNAL AUDITS

REPORTING STANDARDS OF NONPROFIT ORGANIZATIONS

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• In order for Board members to make educated decisions – financial information must be:

–Accurate & Complete •Enable management & board to make informed decisions

–Timely •Keep current on financial status

–In Context •Presented in relationship to the history- Goals & Programs of your nonprofit

–Appropriate • Include financial information deemed important to management & board

PRINCIPAL FINANCIAL DOCUMENTS

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• Annual Budget

• Monthly/Quarterly unaudited financial statements prepared by staff

• Other ad hoc or unique financial reports

– Budget to actual reports – Cash flow projections • Annual audited financial statements

ANNUAL BUDGET PROCESS

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• Development based on historical activity

• Assumptions made on objectives for coming year

• Revenue goals

• Expense estimations

• Template and feedback

• Board approval

FINANCIAL STATEMENTS

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Basic Financial Statements: Reporting on Business Activities

Beginning of the Year End of the Year January 1 December 31

Statement of Financial Position At a Point in Time

Statement of Activities For a Period of Time

Statement of Cash Flows For a Period of Time

Statement of Financial Position At a Point in Time

Beginning of the Fiscal Year (July 1)

End of the Fiscal Year (June 30)

STATEMENT OF FINANCIAL POSITION: THE BASIC FORMULA

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SEE SAMPLE FINANCIAL STATEMENT HANDOUT – PAGE 2

Assets (resources of the

organization)

Liabilities (amounts owed to outside creditors)

Net Assets (amount of the

resources “owned” by the organization)

_ =

WHAT DO THESE REPORTS MEAN?

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STATEMENT OF FINANCIAL POSITION

• AKA - Balance Sheet • Snapshot as of a specific date • Summaries of organization’s resources,

obligations and net worth • Three components:

– Assets = resources – Liabilities = obligations/debt – Net Assets = net worth (from inception to date)

• Typically arranged in order of liquidity

– Current: 1 year or less – Long-term: greater than 1 year

WHAT TO LOOK FOR IN EACH REPORT

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STATEMENT OF FINANCIAL POSITION- ASSETS

• Cash and cash equivalents

– Sufficient to meet current obligations? – Inadequate or excessive? – Increasing or decreasing?

• Accounts receivable

– Composition? – Age? – Allowance for doubtful accounts?

WHAT TO LOOK FOR IN EACH REPORT

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STATEMENT OF FINANCIAL POSITION- ASSETS

• Promises to Give / Pledges Receivable

– Policies for proper recognition and monitoring of collections?

• Investments

– Portfolio composition consistent with policy? – Rate of return consistent with expectations?

• Fixed assets

– Composition? – Capitalization and depreciation policies?

WHAT TO LOOK FOR IN EACH REPORT

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STATEMENT OF FINANCIAL POSITION- LIABILITIES

• Accounts payable and accrued expenses – Invoices received for goods and services not yet paid – Proper cut-off – completed, included as expenses as of the

current period

• Deferred revenue – Future obligations to members – Included in cash balance – Typically recognize 1/12 of dues for each month as

revenue

• Debt – Purpose, terms, policies and covenants – In compliance with any covenants?

WHAT TO LOOK FOR IN EACH REPORT

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STATEMENT OF FINANCIAL POSITION- NET ASSETS

• 3 classes of net assets:

– Unrestricted – available for general operations • Board designated • Undesignated

– Temporarily restricted—donor restriction for specific purpose or time period

– Permanently restricted—donor restriction that never expires

• Compliance with restrictions?

• If net assets are in a deficit situation, is this a “going concern” issue?

STATEMENT OF ACTIVITIES: THE BASIC FORMULA

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SEE SAMPLE FINANCIAL STATEMENT HANDOUT – PAGE 4

Revenue and

Support

_ Expenses Program Services

Mgm’t and General Fundraising

= Increase or

(Decrease) in Net Assets

WHAT DO THESE REPORTS MEAN?

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STATEMENT OF ACTIVITIES

• AKA - Income Statement

• Financial information over a period of time

• Summarizes sources of funds (revenue), uses of funds (expenses) and net income or loss (change in net assets)

• Expenses are classified by function into programmatic and supporting (management and general / fundraising)

CONTRIBUTIONS RECEIVED

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• No Donor-Imposed Restrictions –Unrestricted Support

Recognize revenue when received or promised

• Donor-Imposed Restriction –Temporary – Donor-specified use is satisfied

by fulfillment of purpose or passage of time –Permanent – Donor imposed restriction cannot

be removed by the NPO Recognize revenue when received or promised

• Donor-Imposed Conditions –Specifies a future or uncertain event –Contribution depends on overcoming a barrier Recognize revenue as condition is met

WHAT TO LOOK FOR IN EACH REPORT

STATEMENT OF ACTIVITIES

• Revenue and expenses

–Increase or decrease? –How do results compare to budget and prior year amounts?

–Expenses- percentage of program expenses compared to supporting services (no more than 25%)?

• Change in net assets

–Net income (surplus) or net loss (deficit)? –If a net loss, is it a real deficit or timing issue? –What is causing the net loss?

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STATEMENT OF FUNCTIONAL EXPENSES (PAGE 6)

• Provides analysis of non-profit’s service efforts, including total costs and allocation of resources

• More detailed line items of expenditures • Separates program from supporting services • Multiple program services may be reported • Supporting services = Management and General

expenses as well as Fundraising • How are various expense items allocated between

programs, M&G and fundraising? • Does resource allocation appear to be reasonable

based on: – Nature of program? – Revenue generated from program?

WHAT DO THESE REPORTS MEAN?

WHAT DO THESE REPORTS MEAN

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STATEMENT OF CASH FLOWS (PAGE 8)

• Summarizes sources and uses of cash into three categories:

–Operating Activities- day to day general operations –Investing Activities- purchases/sales of capital assets, investments, etc.

–Financing Activities- proceed from loans, line of credit

• This Statement Can Give the Reader Information on Historic Cash Flow (as opposed to the accrual basis which is required for GAAP financial statements)

WHAT DO THESE REPORTS MEAN?

FOOTNOTES TO FINANCIAL STATEMENTS

•Summarizes:

– Organizational structure, mission and sources of funding

– Significant Accounting Policies effecting the presentation of financial statements

– Explanations of key items on the Statement of Financial Position and Statement of Activities

– Concentrations of business credit risk, commitments, contingencies, related party transactions

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COMPILATION, REVIEW AND AUDIT

COMPILATION

Financial statements are issued in accordance with AICPA professional standards, but no assurance is expressed that the statements are in conformity with GAAP

REVIEW

Financial statements are issued in accordance with AICPA professional standards and there limited assurance is expressed that the statements are in conformity with GAAP

ATTESTATION (AUDIT)

Financial statements are issued in accordance with AICPA professional standards and positive assurance is expressed that the statements are in conformity with GAAP

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Julie L. Jones, Partner jjones@raffa.com 202.955.6724