more on nonprofit financial statements webinar 2
Post on 24-Dec-2015
214 Views
Preview:
TRANSCRIPT
More on Nonprofit Financial Statements
Webinar 2
Today’s Session Topics
• Cash and accrual basis of accounting• Fiduciary and financial reporting requirements
for restricted resources• Review of Pilgrim Services Society financial
statements
3
Cash vs. Accrual Accounting• Cash basis recognizes:
– Revenues when cash received – Expenses when cash is paid
• Used by individuals, some small businesses and nonprofits• Benefits
– Easy to implement– Easy for a third party to verify
• Costs– Can misrepresent the financial condition, activities and
cash flows of an organization• Cash basis of accounting is not permitted under GAAP.
What’s Wrong with the Cash Basis – An Example• The Situation: Ann has a new job with a salary of $50K:
she bought a new car for $20K with an auto loan: and used her new credit cards to cover all her expenses ($25K) except her rent ($20K) which she paid for the year.CASH BASIS ACCRUAL BASIS
BALANCE SHEET BALANCE SHEET
Cash $30k Cash $30k
Car $20k
Total Assets $30K Total Assets $50K
Credit Card Debt $25K
Car Loan $20K
Total Liabilities $45K
Net Worth $30K Net Worth $ 5K
INCOME STATEMENT INCOME STATEMENT
Salary $50K Salary $50K
Rent 20K Rent 20K
Other Expenses 25K
Net Income $30K Net Income $ 5K
5
Revenue Recognition – Accrual Basis
• Under accrual accounting, revenue is recognized when two key criteria are met:– Revenue is EARNED
• The critical event in process of earning revenue has taken place – a service is performed, goods are provided, ownership is transferred, etc.
– Revenue is MEASURABLE• Amount to be collected is reasonably
assured and can be measured with a fair degree of reliability
• “Net realizable value”
6
Expense Recognition – Accrual Accounting
• Under the accrual basis– Recognize expenses when
“incurred” and “measurable” when benefit has been received or liability incurred
• Work has been performed by employees• Food has been ordered and received for
cafeteria– Matching principle applies –
expenses are recognized when related revenue is recognized
Accrual Basis of Accounting
• Required under GAAP• Cash can be received before or after revenue and
expense is recorded• Benefits
– Reflects ultimate financial performance and position irrespective of cash payments or receipts
• Cons– More difficult and costly to maintain– Relies heavily on estimations and
judgments• Modified Accrual basis is a compromise for
small, international or developing NGOs
7
Practical Compromise• Size or development stage of nonprofits may limit ability to
fully implement accrual accounting – particularly international NGOs
• Cash basis of accounting is used by some NGOs in developing countries
• Modified accrual basis of accounting is a reasonable compromise:– Cash basis of accounting used for monthly or internal reporting– Conversion to accrual basis done for audit, or for
monthly/quarterly/annual financials– External accountant used for accrual adjustments
• Restricted funds must be separately accounted for in all cases.
9
Asset in Accrual Accounting
• Accounts Receivable - revenue recognized in
advance of cash being received• Prepaid Expenses - advance payments• Inventory - supplies acquired before use• Fixed assets - purchase that will benefit multiple
future periods for buildings, equipment• Depreciation expense – annual “use” of fixed
assets
10
Liabilities in Accrual Accounting
• Accounts payable to reflect expenses not yet
paid for• Deferred revenue to reflect revenue received
but not yet earned• Notes payable - borrowings that must be
repaid• Long term obligations - pension
Revenues, Expenses, Assets or Liabilities????
• Purchase of supplies to be used in next year• Payment of salaries for current month• Receipt of subscriptions for a magazine for 3
years• Receipt of unrestricted gift
11
Valuation Concepts – Assets and Liabilities• Assets are generally recorded at the lower of cost or
market value – or net realizable values• Investments are recorded at market value• Fixed assets are recorded at cost less depreciation• Accounts receivable (and pledges) are recorded at
net realizable value (net of allowance for uncollectible accounts)
• Liabilities are recorded at amounts expected to be paid
• Assets and liabilities are periodically adjusted to reflect changes in values due to:– New circumstances (market values, sales)– Use in the operations (fixed assets, deferred revenue)
12
13
Capitalization vs. ExpenseA Cost can be expensed immediately or deemed an asset. If an asset, it is stored on the balance sheet until it is expensed or used up.To recognize/capitalize an asset, it must meet two criteria:
1. Rights AcquiredRights to future benefits have been acquired in a transaction
2. MeasurableBenefits are in the future and can be estimated with reasonable certainty
14
Purchasing a Computer A computer is purchased for $10K today that will be used for 5 years– Right Now
• Fixed Asset is recorded– this resource will benefit the future (Asset increase)
• Cash is reduced (Asset decreased)– As asset is used over time
• Expense is recognized for $2K in each year of use (Expense Increased)
• The value of the fixed asset is “depreciated” (Asset decreased)
• Fixed assets show net undepreciated or remaining value– Generally
• Costs to maintain an asset’s benefits are expensed • Costs to increase an asset’s benefits are capitalized
Fixed Asset AccountingYear Fixed Asset
(original cost)Accumulated Depreciation
(annual accumulation)
Net Fixed Asset(Balance Sheet)
Depreciation Expense (Activity
Statement
1 10000 2000 8000 2000
2 10000 4000 6000 2000
3 10000 6000 4000 2000
4 10000 8000 2000 2000
5 10000 10000 0 2000
Accounting for Debt
• Debt includes two components:– Principal = amount borrowed less payments to
date– Interest = annual expense to reflect cost of
borrowing at stated rate applied to principal balance
• Accounting for Payments:– Principal payments reduce liability– Interest payments increase expense (cost of
borrowing)
Accounting for DebtYear Cash Activity
Balance SheetDebt Activity
Balance SheetDebt BalanceBalance Sheet
Interest ExpenseActivity
Statement
1 45000 50000 50000 5000
2 (14000) (10000) 40000 4000
3 (13000) (10000) 30000 3000
4 (12000) (10000) 20000 2000
5 (11000) (10000) 10000 1000
6 (10000) (10000) - -
Net Impact $15k less cash net 50k Borrowed $50k Repaid $15k cost of
borrowing
18
Importance of Estimates• Assets and liabilities recorded at expected ultimate
realizable value
• Major areas of estimation in nonprofit organizations:– Accounts receivable– Pledges receivable– Investments (next class)
• Judgments are required to reflect appropriate values in financial statements
19
A Telemarketing Campaign
As a result of a telemarketing campaign, 1,000 people promise to contribute $50 each to an NFP in February. Historically 4% of donors fail to pay.
NFP records revenue now for:– $50K as a receivable (asset and revenue
increase)– Less uncollectible bad debt of $2K (reduction of
asset and an increase to expense)
Patient Accounts Receivable
• Services to patients total $100K which have not yet been collected
• Assessment of age and payment source shows 25% uncollectible experience
• Receivable and revenue recorded for $100K • Allowance for uncollectibles of $25K is
recorded to reduce receivable to net collectible amount with bad debt expense of $25K
20
Importance of Footnotes
• Notes to Financial Statements add critical data and insight:– Details accounting policies and practices – “GAAP
summary”– Detail on financial statement components –
investments, fixed assets, debt– Highlight financial matters not included in the
numbers – uncertainties, contingencies, estimates• Audited financial statements are required to
contain such disclosures
New Resource – Khan Academy
• You Tube Educational Videos – Thousands of Topics
• Try these (listed under “Finance” category:– Cash Accounting – Accrual Accounting– Comparing Cash and Accrual Accounting– Balance Sheet and Income Statement Relationship– Basic Cash Flow Statement
22
Accounting for Restricted Resources
• Gifts or resources are provided which contain restrictions as to use
• NFPs have a fiduciary responsibility to record and account for these resources through “fund accounting” – identifying revenues, expenses, and net assets separately in the accounting records
• Financial statements must disclose nature and activity of net asset categories (“funds”)
• Three types of funds (net assets):– Unrestricted net assets– Temporarily restricted net assets– Permanently restricted net asssets
23
Unrestricted Net Assets
• Unrestricted net assets are the resources available for use in accordance with the general purposes of the NFP
• Also called:– Operating funds– General fund
• Board designated funds are unrestricted funds which have been designated by the board for a specific purpose– Whatever a board designates, it can undesignate
24
Temporarily Restricted Funds
• Temporarily restricted funds are resources given to the NFP which contain either time or use restrictions
• Temporarily restricted funds include:• Restricted grants and contracts• Funds for specific purposes• Pledges receivable which are due in more than one
year – an implicit time restriction• When restrictions are met, amounts are released through a
transfer to unrestricted funds
25
Permanently Restricted Funds
26
• Permanently restricted funds are resources given to a NFP which require that the principal (corpus) be invested in perpetuity with the income used for restricted or unrestricted purposes
• Permanently restricted funds – Are also called Endowment Funds– Realized and unrealized gains are usually classified as
temporarily restricted funds or unrestricted funds – depending upon state legislation
27
Pilgrim Services Society “Road Map”
• Gain further understanding of financial statement information
• Realize importance of “Notes to Financial Statements”
• Begin analysis of financial information
The Pilgrim Service SocietyBalance Sheet
As of June 30, 2005
UnrestrictedTemporarily Restricted
Permanently Restricted Total
ASSETS:Cash $63,022 $120,971 $183,993Short-term investments 770,000 770,000Accounts receivable 19,584 19,584Grants and pledges receivable 115,961 115,961Interest receivable 12,253 12,253Prepaid expenses and other assets 29,365 29,365Total current assets 1,010,185 120,971 0 1,131,155Investments 44,407 474,007 660,000 1,178,414Pledges receivable 1,550,684 1,550,684
Property and equipment, net of accumulated depreciation 1,104,934 1,104,934
Total assets 2,159,526 2,145,662 660,000 4,965,187
LIABILITIES: Accounts payable 866,952 866,952 Deferred revenue 483,469 483,469 Current portion of long-term debt 50,000 50,000 Total current liabilities 1,400,421 0 0 1,400,421
Long term debt 798,409 798,409 Total liabilities 2,198,830 0 0 2,198,830
NET ASSETS: Accumulated operating deficits (547,393) (547,393) Property and equipment 256,525 256,525 Board designated 251,563 251,563 Restricted for program activities 2,060,130 2,060,130 Endowment appreciation 85,532 85,532 Restricted endowment 660,000 660,000 Total net assets (39,305) 2,145,662 660,000 2,766,357
Total liabilities and net assets $2,159,525 $2,145,662 $660,000 $4,965,187
2005
30
The Pilgrim Service SocietyStatement of Activities
for trhe years ending June 30, 2005
UnrestrictedTemporarily Restricted
Permanently Restricted Total
OPERATING SUPPORT & REVENUEOperating support: Contributions $2,174,893 $956,019 $3,130,912 Grants 313,290 537,465 850,755 In-kind contributions 47,839 47,839 Special events 493,234 493,234 Net assets released from restrictions 1,070,048 (1,070,048) 0 Total operating support 4,099,304 423,436 4,522,740
Program service fees & other income: Individuals 1,795,000 1,795,000 Commercial insurance fees 751,295 751,295 Contract revenue 5,323,805 5,323,805 Investment income used for operations 50,000 50,000 Other income 150,428 150,428 Total program service fees & other income 8,070,528 8,070,528 Total operating support & revenue 12,169,832 423,436 0 12,593,268
EXPENSESProgram services: Community social services 4,729,253 4,729,253 Daycare services 2,789,241 2,789,241 Behavioral health & addiction services 2,763,117 2,763,117 Total program services 10,281,611 0 0 10,281,611
Support services: Management & general 1,673,750 1,673,750 Fundraising 678,411 678,411 Total support services 2,352,161 2,352,161
Total expenses 12,633,772 12,633,772 Changes in net assets from operations (463,940) 423,436 (40,504)
OTHER CHANGES IN NET ASSETS Return on investments 41,600 76,935 118,535 Income used for operations (17,327) (32,673) (50,000) Net assets released for non-operating purposes 100,472 (100,472)
124,745 (56,210) 68,535
Change in net assets (339,195) 367,226 0 28,031
NET ASSETS, beginning of year 299,890 1,778,436 660,000 2,738,326
NET ASSETS, end of year ($39,305) $2,145,662 $660,000 $2,766,357
2005
31
Other Questions?
• Growing vibrant organization?• Dependence or risk on certain revenues?• Overall capital structure?• Other risks?• What else would you want to look at before you gave
PSS a grant or a loan?
32
top related