If you are not yet familiar with the fascinating details of Financial Accounting Standards Board provisions, this might be a great time to familiarize yourself with FASB 117, FINANCIAL STATEMENTS OF NOT-FOR PROFIT ORGANIZATIONS. These are the "rules" we CPA's must follow in the preparation and presentation of your financial statements.
FASB 117 was issued in June 1993 and had an effective date for fiscal years beginning after December 15, 1994. For those not-for profit organizations that have less than $5 Million in total assets (what you own) and less than $1 Million in annual expenses, the effective date was delayed until fiscal years beginning after December 15, 1995. Therefore, all Organizations are now supposed to be in compliance with this provision.
This FASB now requires a complete set of financial statements to include:
- Statement of Financial Position
- A Statement of Activities
- A Statement of Functional Expenses (for Voluntary Health and Welfare Organizations and encourages it for other not-for-profit organizations)
- A Statement of Cash Flows
- Financial Statement Disclosures
These are the precise titles you should be seeing on your current financial statements. Balance Sheet and Income Statement are not appropriate. There are also many new terms you may find in the body of these "new" financial statements and related disclosures you may find unfamiliar.
In this month's scintillating installment we will review the Statement of Financial Position (a not-for -profit form of Balance Sheet). Basically this statement must include the amounts of each of the following classes of assets, based on the existence or absence of donor-imposed restrictions:
- Temporarily Restricted Net Assets ~ The part of the net assets resulting primarily from the receipt of contributions whose use by the organization is limited by donor-imposed stipulations that either expire by passage of time or can be fulfilled and removed by actions of the organization pursuant to those stipulations. (Example: Donor designates $10,000 of contribution be temporarily set aside - restricted - for acquisition of services of a consultant to assess technology needs of the organization. Earmarked funds, so to speak).
- Permanently Restricted Net Assets ~ The part of the net assets of a not-for-profit organization resulting from contributions whose use by the organization is limited by donor-imposed stipulations that neither expire by passage of time nor can be fulfilled or otherwise removed by actions of the organization. (Example: John Smith Estate leaves $50,000 to the organization with the stipulation that the annual interest income earned by provided as scholarship funds each year to students entering college to study genetic research).
- Unrestricted Net Assets = The part of net assets of a not-for-profit organization that is neither permanently restricted nor temporarily restricted by donor-imposed stipulations. In other words, everything else.
Whoa, you might say. What the heck is NET ASSETS? Simply put, this is the net result of subtracting what you owe (your liabilities) from what you own (your assets). In the for-profit entity this is commonly referred to as "equity."
Another way to look at this measure is that it shows you what would remain after all obligations were serviced if you had to wind the organization down as of the date of the financial statement. There you go, clearer than mud, right?
This portion of the provision serves to categorize the components of this measure of your "equity" and clearly present to the reader of the financial statement, what is available vs. restricted for future operations.
Either the Statement of Financial Position or the notes must provide information on liquidity, financial flexibility (i.e. restrictions) and interrelationship of assets and liabilities. The information should be aggregated into reasonably homogeneous groups. Cash or other assets that are received with donor-imposed restrictions should not be classified with cash or other assets that are unrestricted and therefore available for current use.
Information about the nature and amount of different types of permanent and temporary restrictions must be included in the financial statement disclosures. These disclosures must distinguish between permanent restrictions of holdings of assets which must be used for a specific purpose, preserved or not sold and assets donated with the provision that they be invested to provide a permanent source of income (permanent endowment).
Board designated endowments of unrestricted assets need to be classified with unrestricted net assets but disclosed either in the body of the financial statement or in the notes as board designated. For instance, the board may decide that portfolio earnings be used for replacement of equipment thereby designating these funds for a particular purpose.
In becoming well versed in the components within FASB117, your comprehension of your financial statements will increase. In addition, you will find them to be a much more valuable management tool.
This exercise can also enhance your relationship with your professional advisor. Everybody wins! The more we understand about the "rules of the game" and goals of the organization, the better we can support one another as members of the team.
Hopefully this summary has given you food for thought and identified some questions for you to ask your practitioner. In future articles I will cover the remaining components of the financial statements. Feel free to contact me if I may assist you in clarifying any of this material.
Also, let me know if there are subjects you would like to see addressed to better support you in this specialized area of leadership and management of exempt organizations.
"Oh, don’t bother me," said the duchess, "I never could abide figures." Lewis Carroll, Alice in Wonderland
In my previous article we were having a scintillating discussion on rules impacting the presentation of your financial statements. As promised, I will continue this discussion and help you be more astute readers of these accounts of your previous year’s financial history.
I received a number of comments on my previous column relative to actual applicability of these rules to 501(c)(6) organizations. These standards, while primarily directed to (c)(3) Organizations, are strongly recommended to (c)(6) and the like. They allow one to present more clearly the activity of the organization.
Statement of Activity.
This statement shows all the organization’s FINANCIAL activity FROM THE BEGINNING TO THE END OF THE YEAR. The TITLE of this statement can be any of the following, including:
- Statement of revenue, Expenses and changes in Net Assets
- Statement of changes in net assets
- Statement of revenues and expenses
The title is less important than that this statement present all relevant activity for the period.
There should be two sections. One showing revenue and expenses while the other shows .. you guessed it.. changes in net assets.Net assets are the components of your equity section. Formerly fund balance accounts.
It is usually suggested that these two sections be shown as a combined statement in that changes in net assets usually presents few transactions.
Our next item is Statement of Functional \Expenses
As you know, Associations and Professional Societies can exist only so long as their membership believes that the services being rendered justify the dues and other payments being made. Since the members must see benefit for their money, the Association has an even greater need to communicate it’s financial activity with clarity.
Functional reporting is a most effective way of communication since it requires the leadership (Board) to identify the programs of the Association and their related costs. While this is not required, once again, of (c)(6) organizations, perhaps you can see the value to yours.
SFAS 117 actually allows the detail of these expenses to be presented in the footnotes. However, it is recommended these details be shown in the primary statements where the reader can really see them and thereby more readily comprehend the workings of the organization . . . and their money!
Statement of cash flow is relatively new to many organizations. It shows where the organization received and spent their money. These activities will be presented in three categories:
- operating cash flows
- financing CASH FLOWS, AND
- INVESTING CASH FLOWS
For profit businesses have been required to present this financial statement for a years under sfas 95 "Statement of cash flows." This is where guidance is provided in preparation of this statement.
There are two basic methods for preparing this statement: the indirect and direct methods. Basically, the indirect method starts with the excess of revenue over expenses and reconciles this number to operating cash flows. While the recommended method, direct, reports operating cash receipts and cash disbursements, directly adding them to arrive at operating cash flows. The direct method appears to be more easily understood by the reader of the financial statements.
Financial statement disclosures
These are the footnotes to your financial statements. They present information that is not readily apparent from reading the numbers.
For instance, the form of exemption which applies to you (c6, c3, etc.). The explanation behind the restriction on funds, if any. Tax liability which may have been incurred.
When you have a moment, go back and re-read your "footnotes" and make sure they (1) clarify information about your organization (2) still apply, and (3) that there is nothing else you feel should be included here. Your accountant can provide you plenty of guidance on the pros and cons of including particular information and the appropriate wording.
You and your professional advisor and the readers of these statements are best served when you work together on this document to produce the best, most accurate account of the previous year’s activity.
Method of accounting
Many small and medium non profit organizations use the cash basis or some modification internally. Another of the requirements on the presentation of these financial statements is that the accrual method be used. This does not mean that one has to change their internal method of bookkeeping, only that a conversion calculation be made before presenting this information in the form of financial statements.
The last word . . .
SFAS 117 emphasizes the value of reporting on the organization as a whole with clarity and appropriateness and no longer mandates the traditional use of fund accounting. The goal, appears to be to provide greater understanding to the reader of these financial statements.
In a future article, we will conclude this discussion by covering considerations relative to the manner in which to disclose information about related or feeder corporations in these financial statements. As always if there are any questions or advice, feel free to contact me.
