1. Interpreting Nonprofit Financial Statements By James L. White Bernard & Franks, A Corporation of Certified Public Accountants

2.  jimwhite@bernardfranks-cpa.com jimwhite@bernardfranks-cpa.com  James L. White  4141 Veterans Boulevard  Suite 313  Metairie, LA 70002  (504)885-0170 Contact Information

3.  Over one million nonprofits in the US  For GAAP purposes (ASC 958-10-20)  Receive contributions (gifts)  Mission driven  Absence of ownership interests  Tax Classifications  501(c)(3)-Charitable organizations  501(c)(4)-Civic and Social Welfare  501(c)(6)-Business Leagues  501(c)(7)-Social and Recreational Introduction to Nonprofits

4.  Only VHW are required to present a statement of functional expenses.  GAAP definition of VHW  Contributions from the public (not Government)  Purpose must be to provide health, welfare, or community services.  Examples of VHW are Salvation Army, Red Cross, Goodwill Industries, United Way, Boy Scouts, etc. Voluntary Health and Welfare Organizations

5. Understanding Differences Between Commercial and Nonprofit Reporting

6.  Groups that external statements should address:  Funders  Regulatory agencies  Governing boards  Beneficiaries of services  Employees  Creditors  National organization Objectives of Nonprofit Reporting

7.  Communicate the use of resources  Identify the principal programs and costs  Communicate ability to carry out fiscal objectives  Other objectives include:  Amount and nature of assets, liabilities and net assets  Inflows and outflows of resources  Factors that affect liquidity  Service efforts of the organization Objectives of Nonprofit Reporting

8.  Comparative financial statements  Prior years  Budget  Fund accounting  Not required by GAAP Other General Financial Reporting Issues

9. Three “bucket” reporting Significant Differences Between For Profit and Nonprofit Financials UnrestrictedTemporarily Restricted UnrestrictedPermanently Restricted

10.  Permanently Restricted-Donor imposed permanent restrictions on contributed assets.  Endowment  Land committed to be used for programs  Temporarily Restricted-Donor imposed temporary restrictions on contributed assets.  Time  Use  Unrestricted-No donor imposed restrictions. Significant Differences-Three Buckets

11.  Contributions-generally are voluntary, unconditional transfers of assets (or cancellations of liabilities).  Results in an asset “unconditional promises to give”.  Can be placed in any of the buckets based on donor imposed restrictions.  Immediate recognition of revenue when conditions are met are not required. For example, an unconditional pledge is recorded as revenue when delivered to nonprofit.  Must determine if a contribution (gift) or exchange transaction. Significant Differences-Revenue Recognition

12.  Statement of Financial Position as opposed to Balance Sheet.  Net assets as opposed to retained earnings  Must be separated by unrestricted, temporarily restricted and permanently restricted.  Statement of Activities as opposed to Income Statement  Increase (decrease) in Net Assets as opposed to Net Income. Significant Differences-Terminology

13. Interpreting Nonprofit Statement of Financial Position

14.  Nonprofit statements are not required to include the caption of “Current Assets” and “Current Liabilities.”  Classified-Statement can include the Classification which allows for current ratio and quick ratio analysis.  Sequenced Statement-Assets and liability are sequenced according to their nearness to cash and maturity.  Other-Liquidity information is in no particular order. Liquidity is disclosed in the notes. To Classify or Not to Classify?

15.  Focus on restrictions to cash  Cash available for current unrestricted use does not need to be segregated.  Cash limited to long-term purposes (even if it meets the cash equivalency definition) should be excluded from cash.  Examples:  Cash restricted for acquisition of property  Cash in permanent endowment Cash

16.  Marketable equity securities (equity and debt securities) with readily determinable market values must be reported at fair value.  Contributions of investments are recorded at fair market value. Investments

17.  Consider restrictions-Donor requirements may produce long- term assets, (e.g. Investments Held for Endowment).  Restrictions can be placed on investment income  Restrictions can be placed on investment gain  In the absence of donor restrictions or law, donor restrictions on income applies to the fund's net appreciation.  In the absence of restrictions or law, restrictions on income applies to the fund’s net losses on investments and reduce appreciation in which use restrictions have not been met. Remaining losses reduce unrestricted net assets. Subsequent gains can restore previous decreases.  Board designated endowments- gains and income are always considered unrestricted net assets. Endowment Investments

18.  Abandons historic cost as a floor for expenditures  Allows expenditures from endowments during an economic downturn.  The Board must act prudently in good faith considering a number of factors in deciding a distribution from an endowment. Endowment Funds-UPMIFA

19.  Requires the historical dollar amount of an endowment must be preserved.  Absent donor restriction net appreciation (realized and unrealized) is spendable. Endowments-UMIFA

20.  Promises to Give-(also called pledges) are oral of written agreements by donors to contribute cash or other assets. Must be recorded immediately.  Pledges must be verifiable  Pledge card  Tape recordings  Contemporaneous registers  Written follow-up correspondence  Promises to give must be unconditional.  Promises to give are recorded at fair value if to be collected in more than one year. Amortization is charged to contributions not interest.  Collectability must be considered and allowance for doubtful accounts established. Promises to Give

21.  Purchased inventory is recorded at lower of cost (FIFO, LIFO, average) or market.  Donated inventories are recorded as contributions and inventory at the fair market value at date.  Donated items that have no value should not be recognized (e.g. outdated clothing). No value if:  Cannot be used internally in programs and activities.  Cannot be sold. Inventory Issues

22.  Collections are defined as works of art, historical treasures, that are- 1.held for public display, education, or for research. 2.protected, cared for and preserved, and 3.subject to a policy that requires sales of collectibles to be reinvested into other collectibles.  Acceptable accounting includes:  Capitalization (no depreciation)  No capitalization  Capitalize only collection items after adoption of SFAS 116 Collections of Items

23. Interpreting Nonprofit Liabilities

24.  Collection of cash received in advance of the delivery of goods or performance of services are liabilities. Examples include:  Membership dues and fees received in advance.  Advance ticket sales.  Advance rental payments.  Deferred Revenues should be reduced and revenues recognized ratably over the period earned (e.g. membership dues).  On classified statements, deferred revenues should be segregated between current and long-term. Deferred Revenues

25.  Refundable advances result from: 1.Receipt of an advance from third party in which the services have not yet been performed (exchange transaction). 2.Receipt of a contribution subject to donor imposed restrictions and the conditions have not yet been fulfilled. Refundable Advances

26.  The awarding of a unconditional contribution s to other organizations should be recorded as a grant payable liability.  This is the reciprocal of the unconditional promise to give. Grants Payable

27.  Agency transactions-Voluntary transfers of assets to a nonprofit –  Nonprofit has little or no discretion over the use of the assets.  Really acting as an agent for the transfer of funds to another nonprofit agency.  Agency transactions are recorded as liabilities, funds are for other Organizations. When Is Receipt of a Contribution a Liability?

28. Interpreting Net Assets

29.  Net Assets-represent the difference between assets and liabilities.  Must be classified according to:  Unrestricted-not restricted by donors or by law.  Can be designated by Board action.  Board can never restrict.  Temporarily Restricted-Use has been restricted by donor- imposed time or use restrictions.  Permanently Restricted-Restricted by donor or law to be maintained for perpetuity. Net Assets

30. Interpreting Statement of Activities

31.  Contribution-voluntary, unconditional transfers of assets (or payment of liabilities)  Nonreciprocal-gives something with nothing received in exchange.  Gift out of kindness of heart.  Recorded as asset and income when conditions are fulfilled or amount determinable.  Exchange Transactions-purchase of goods and services from another party.  Recognized as revenue as services performed or goods delivered.  Agency Transactions-Nonprofit is really an agent.  No revenue recognized.  Funds are recorded as a liability until delivered to other agency. Revenue Recognition Issues

32.  Donated materials are recorded at fair market value and are considered contributions.  Donated items used in retail operations should be recorded as inventory and contributions. Sales and cost of sales are recorded upon sale.  Free advertising is recorded at fair market value. Donations of Materials

33.  Contribution income (fair value) is recorded for the free or below market use of facilities.  Value cannot exceed the fair market value of the asset being used.  If the contribution is for several years, than the contribution is the net present value of the fair rental values.  Contribution is recorded as temporarily restricted net asset and released over time. Donation of Facilities

34.  The fair value of donated services is recorded as contribution revenue and expense if:  Create or enhance a nonfinancial asset (e.g. non-skilled labor to build a new facility).  Require specialized skills and would be needed to be purchased if they were not donated. Donation of Services

35.  Membership dues might be a combination contribution revenues and a portion might be exchange transaction.  Exchange portion of dues would provide benefits to members; contribution would provide benefits to others  Exchange portion is classified as deferred revenues and is earned ratably over the membership period. Membership Fees

36.  Reclassifications take place between temporarily restricted net assets and unrestricted net assets  Reclassifications take place when restrictions (use or times) are satisfied.  Reclassifications have no effect on total net assets. Reclassifications

37.  Program Expenses-Direct and indirect costs related to providing programs and social services.  “Hands on” client and program expenses  Describe the programs-opportunity to market services and benefits to the community and funders.  Program services includes allocation indirect cost such as facility use (rent, utilities, insurance, etc.), telephone, supplies, supervision, etc. Expenses

38.  Support expenses-Activities not directly related to the mission of the nonprofit.  Management and General-Includes accounting, board expenses, business management, finance, budgeting expenses.  Includes Executive Director and their staff, except for the time spent supervising program, fundraising.  Fundraising-Includes all expenses related to the appeal for funds.  Payments to Affiliated Organizations-Allocated between program and administrative services when possible. If the allocation cannot be determined, then the costs is G&A. Expenses

39.  All expenses must be reported in the Unrestricted Net Asset bucket.  Netting of expenses against revenues is not allowed (except for investments).  Depreciation is required. Expenses

40. Allocations Account  Salaries and wages  Employee benefits  Office rent  Utilities  Building supplies  Telephone Allocation Method  Time sheets  Based on salaries and wages  Square footage  Number of phones Important for nonprofit to have an allocation plan. A general plan would be as follows:

41.  Nonprofit organizations often have joint purpose printed materials or events. Organizations wish to classify expense as program, G & A and fundraising  The default classification for joint expenses is fundraising expense. To overcome this presumption:  Purpose must have a program component and request an action other than fundraising.  Audience must be selected to meet a program need.  Content must support program goals. Fundraising-Joint Costs

42.  The three buckets of Net Assets (Unrestricted, Temporarily Restricted and Permanently Restricted) must be presented in Statement of Activities.  Can be presented in columns  Can be presented in sections Three Bucket Reporting

43.  Required for Voluntary Health and Welfare organizations.  Large donors require the information.  Natural expense categories  Required to allocate expenses between program and support (G & A and fundraising). Interpreting the Statement of Functional Expenses

44.  Cash and cash equivalents that have been  designated for long-term purposes, or  received with donor restrictions for long-term use should be excluded from cash or equivalent.  Receipt of contributions restricted to long-term purposes is classified as a Financing activity. The amount would also need to be a reduction from operating activities to balance the statement when using the indirect method. Interpreting the Statement of Cash Flow

45.  Unconditional Promise to Give  Amounts receivable in one to five years.  Amount of the Allowance for Uncollectible  Unamortized discount ( also face amount and discount rate)  Conditional Promises to Give must be disclosed  Property policy for the handling of donations of long-lived assets.  Nature of relationship with owner of donated property  Nature of restrictions on assets.  Details of permanent and temporarily restricted net assets. Interpreting Nonprofit Disclosures

46.  Donated services disclosure can include the hours of service not recorded.  Concentrations of revenue (grants, contributions, etc.) should be disclosed.  Nature and amounts of related party transactions.  Allocation methods should be disclosed.  Income tax status is disclosed. Interpreting Nonprofit Disclosures

47. Using Financial Ratios in Interpreting Financial Statements

48. FINANCIAL RATIO MEANINGIF HIGHIF LOW Statement of Financial Position Net assets (excess of assets over liabilities) A measure of reserves available to the organization-net worth. Indicates good financial health, however if very high organization could look too rich. Organization is not in good financial standing. Ratio of net assets to total expenses. Organizations should strive for a ratio of 50 to 100% Again measures overall financial health of the Organization Low % indicates Organization should increase retained profits or poor financial health. Current ratio (ratio of current assets divided by current liabilities) Ratio should be 1.5 to 3.00 times. Indicates if Organization has proper working capital to finance operations. Organization has good working capital to meet immediate needs of the operation. Organization may have inadequate cash and working capital to finance the operations. Financial Ratios For Nonprofits

49. Statement of Activities Excess of revenues over expenses Indicates if operations are profitable. Operations are profitable. If too high Organization may not be providing all services it could. Unprofitable operations will lead to financial difficulties if continued. Comparison to budgetAssesses the Organization’s ability to plan. Should be close to budget. Ratio of supporting expenses to total expenses Measures efficiency of Organization; how much of the funds are used for support of the Organization. A ratio under 25% is good. A measure that funds are not being used to support mission of the Organization Indicates operational efficiency Investment income to total investments. Gauges effectiveness of investment management. Could indicate too much risk. Organization may not be generating as much income as possible from investments. Ratio of fundraising expenses to contributions and funds raised. Efficiency in raising money.Fundraising efforts may be inefficient. Indicates efficient fundraising effort, however if too low could indicate lack of aggressive fundraising. Financial Ratios For Nonprofits FINANCIAL RATIO MEANINGIF HIGHIF LOW

50. Net assets/expenses 77.6% - 54.9% Months of expenses in net assets less property 3.9 - 3.4 months Current ratio 6.84 - 4.08 to 1.00 Return on investment 41.5% - 20.9% Profitability to revenues 18.5% - 8.7% G&A to total expenses 16.8% - 16.7% Fundraising to total expense 0.3% - 2.1% Fundraising efficiency 1.3% - 22.7% Revenue growth 12.3% - 5.5% Increase in revenues $920,385 - $387,712 Expense growth (reduction).2% - (1.3)% Sample Report to Management

51. Presenting Financial Statements to Boards, Members and Management.

52. Myth Busting  Nonprofit  No Profit

53.  Understand that 90% if your audience panics when reviewing columns of numbers.  Use tables and graphs when practical. Interpreting Financial Results for Management

54. Sample Chart Report

55. Program 1 Program 2 Program 3 Program 4 Program 5 Program 6 Program 7 Program 8Total Hours Worked6,039.358,463.9913,289.8815,408.0117,646.556,572.927,018.646,183.0374,439.34 Budget hours6,377.549,634.1511,847.2315,472.1518,848.317,409.775,120.776,438.9274,709.92 Sample Table Report HOURS WORKED COMPARED TO BUDGETED HOURS FOR THE YEAR

56. Sample Graph Report

57. Overview - Statement of Financial Position  Assets  (Resources of the Organization)  Liabilities  (Amounts owed to outside creditors)  +  Net Assets =

58.  The Statement of Financial Position is a represents asset, liabilities and net assets in a point in time.  Assets increase of decrease as resources are obtained, or disposed of, become less valuable, or become used up in the course of operations.  Liabilities increase or decrease as obligations are incurred or liquidated. In some cases, liabilities may need to be estimated and are subject to adjustment in latter periods.  Net Assets increases or decreases primarily as a result of income or loss from operations of the organization. Overview-Statement of Financial Position

59. + Revenues (or support) - Expenses: Program Services Supporting Services = Net increase in net assets + Net assets, beginning of year = Net assets, end of year Overview-Statement of Activities

60.  Program service expenses include expenditures incurred for activities in accordance with the organization mission.  Supporting services expenses include management and general and fund-raising expenses.  Changes in temporarily restricted net assets include restricted contributions and restricted investment income less amounts spent in accordance with donor restrictions.  Changes in permanently restricted net assets include donor restricted for endowment contributions.  Increase in net assets is the all-inclusive “bottom line” that reflects all financial activity by the organization for the report period (month, quarter, year). Overview-Statement of Activities

61. + Cash provided by operations +/- Cash provided or used by investing activities +/- Cash provided or used by financing activities = Net increase (decrease) in cash + Cash, beginning of period = Cash, end of period Overview-Statement of Cash Flows

62.  Operating activities include the cash effects of essentially all transactions that are the result of basic operations of an organization.  Includes the increase (decrease) in net assets  Changes in accounts receivable, accounts payable and deferred revenues.  Investing activities include the purchase of property and equipment, or proceeds from the disposition, and also includes investments activities and other long-term assets.  Financing activities include the borrowing and repayment of debt, as well as the receipt of endowments. Overview-Statement of Cash Flows