Telling Your Story in Numbers

Telling Your Story in Numbers:

Getting the Most out of Audited Financial Statements August 18, 2010

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Today’s Speakers

Hosting: Sam Frank, Synthesis Partnership

Assisting with chat questions: Chris Dumas, FirstGiving

Jennifer Ahern Lammers The Philanthropy Hub

www.philanthropyhub.com

[email protected]

http://www.philanthropyhub.com

August 18, 2010

Prepared By:

Jennifer Ahern Lammers, MPA, CNAP

Prepared For:

Nonprofit Webinars – Wednesday Webinar Series

Telling Your Story in Numbers

Making the most of your Audit

The Numbers Matter

They communicate an organization’s priorities

They record an organization’s history

They are one of the only means stakeholders have of

comparing one organization to another quickly and

“objectively”

Who’s Crunching the Numbers?

Board Members & Potential Board Members

Employees & Potential Employees

Donors & Potential Donors

A Growing List of Charity Watch Dogs

Members of the media

By Going Beyond the Numbers:

Management (both board and senior executives) will better

understand and own their financial documents

Organizations will be better at distinguishing themselves

from other organizations competing for the same donor

dollar

Organizations will be more transparent and management will

be a proactive player in the pursuit of accountability

Relevant SFAS’s

Statement Purpose

SFAS #95 (ASC 230)

Statement of Cash Flows

Outlines standards for the presentation

of the Statement of Cash Flows

SFAS #116 (ASC 958)

Accounting for

Contributions Received &

Contributions Made

Outlines standards for the valuing and

recording of contributions received

and made by an NFP

SFAS #117(ASC 958)

Financial Statements of

Not-For-Profit Organizations

Recommends format & content for

financial statements of an NFP

8

More Relevant SFAS’s

Statement Purpose

SFAS #124 (ASC 958)

Accounting for Certain

Investments Held by Not-for-

Profit Organizations

Outlines standards for recording

investments in the financial statements

SFAS #157 (ASC 820)

Fair Value Measurements

Defines how to measure fair value

9

SFAS 116 (ASC 958)

Definitions

10

A transfer based on a future or uncertain event,

the occurrence or non-occurrence of which will

dictate whether the asset is retained by the not-

for-profit organization

Donor-Imposed

Condition:

An unconditional, non-reciprocal transfer of an

asset or cancellation of a liability to a not-for-

profit organization

Contribution:

SFAS 116 (ASC 958)

Definitions (cont’d)

11

An agreement to contribute an asset; it will be

entered into the accounts if verifiable

documentation exists

Promise To Give:

A limitation on the use of an asset placed by

the donor

Donor- Imposed

Restriction:

SFAS 117 (ASC 958)

Classifying Contributions

Unrestricted: Contributions that are free of donor restrictions on

their usage

Temporarily

restricted:

Contributions that have donor imposed restrictions

and may be removed by:

(1) the passage of time or

(2) an act of the organization

Permanently

restricted:

Contributions with restrictions that can never be

removed

12

SFAS 117 (ASC 958)

Contributed Services Recognition

13

Must be recognized if:

Services create or enhance a financial or

non-financial asset

Services provide skills that organization would have paid for if

not been donated

Legal services

Licensed volunteers

According to SFAS 117 (ASC 958):

14

All not-for-profit organizations must present:

Statement of Financial Position (Balance Sheet)

Statement of Activities (Statement of support, revenues,

expenses, and changes in fund balance)


Statement of Functional Expenses, if required, for

Voluntary Health and Welfare organizations

Accompanying Notes to the financial statements

A Simple Truth

Financial statements are increasingly being used by funders, reporters, and other stakeholders to make decisions

about nonprofit organizations

The Audit Process

Provides an independent review of procedures and accounting of

significant transactions

Provides constructive recommendations for improving systems

and procedures

Satisfies external compliance requirements from funders and

some state agencies

The Gold Standard

Audit Opinions

Unqualified

• Considered a “clean opinion”

• States that statements are presented fairly

Qualified

• Statements have one or more material problems

• Raises awareness of issues

Adverse

• Statements do not conform to GAAP

• Readers are provided “no assurance” on the figures

Disclaimer of Opinion

• “No opinion” on statements

• Auditors were unable to apply auditing standards

• Very unusual, rarely issued

Other Options

Reviews

• Step down from a full audit

• CPA provides only limited assurances based on staff inquiries and spot checks of procedures

Compilations

• Further step down

• CPA provides no assurance as to the validity of the numbers

Internally Generated

• Should follow GAAP (FSB 116 and FSB 117) format

• If prepared correctly may be more useful than a compilation

Statement of Financial Position

A picture of the organization’s financial health at the close of

the fiscal year or other specified time period

Also Known as the Balance Sheet

Assets - Liabilities = Net Asset

What you OWN – What you OWE = Anything LEFT OVER

Balance Sheet

Assets

• Most liquid first

• Cash & Cash Equivalents, Contributions Receivable, Investments, Prepaid Expenses, Fixed Assets, etc.

Liabilities

• Due in 12 months or less first, then longer term

• Line of Credit, Accounts Payable, Accrued Expenses, Long Term Debt, etc.

Net Assets

• Unrestricted (includes fixed assets and any board reserves)

• Temporarily and Permanently Restricted

Content and Presentation

22

Must report on organization as a whole

Instead of reporting on separate functions of the organization

Organizes accounts into asset and liability classifications such as:

Current assets, fixed assets, current and long term liabilities, as of a

specific moment in time (last day of the fiscal year)

Focuses on liquidity

Assets are presented in their proximity to cash

Liabilities are presented according to the nearness of their maturity

and resulting use of cash

Net Assets

23

Unrestricted Excludes assets that have donor-imposed restrictions Somewhat similar to the Retained Earnings account of commercial

financial statements

Temporarily Restricted Includes assets for which the use has been restricted by donor

Permanently Restricted

Sometimes called an “endowment account”

Asset must be kept in perpetuity by the not-for-profit organization, per donor instructions

Earnings from Permanently Restricted Net Assets can either be unrestricted or temporarily restricted, per donor instructions

ABC Organization

Statement of Financial Postion

December 31, 2010 and 2009

Assets 2010 2009

Cash $50,000 $82,768

Accounts Receivable $256,164 $314,709

Unconditional Promises to Give $229,382 $204,269

Grants Receivable $54,691 $215,875

Prepaid Expenses $28,463 $40,636

Property & Equipment (net of dep) $1,942,736 $1,993,281

Other Assets $19,054 $26,817

Total Assets $2,580,490 $2,878,355

Liabilities and Net Assets 2010 2009

Liabilities

Line of Credit $117,319 $136,400

Accounts Payable $126,394 $151,759

Accrued Expenses $74,000 $91,080

Accrued Payroll and Taxes $48,461 $120,238

Long-term Debt $673,714 $686,150

Total Liabilities $1,039,888 $1,185,627

Net Assets

Unrestricted 1,076,134 1,050,277

Temporarily Restricted 258003 435923

Permanently Restricted 206465 206465

Total Net Assets 1,540,602 1,692,665

Total Liabilities & Net Assets $2,580,490 $2,878,292

Statement of Activities

A record of an organization’s financial activities

for 12 month period


Where money came from and what it was spent on over a

particular period of time

Most analyzed statement included in an audit packet

Tracking Change

27

Transfers assets from temporarily

restricted to unrestricted based on

satisfaction of those restrictions

Reclassification

Across all categories, based on nature Gains and Losses

Decreases to unrestricted net assets,

presented on a functional basis

Expenses

Shown gross, under each category of

net assets, unless incidental in nature

Revenues

Comment Type of change

Presentation

Revenues are presented according to donor restriction:

Unrestricted

Temporarily Restricted


Although both are accepted by GAAP the column format –

not the stacked – is best as it is much easier to understand

Revenues

Sources of revenue are broken down and often include:

Individual support

Foundation and corporate support

Special events revenue

Earned income

Interest

Assets released from restriction

Only donors can make restrictions!

However, we often shape the nature of the restriction by the

language of the “ask”

Make sure your revenues are appropriately categorized

Make sure you have back up to substantiate nature of the

restriction

Donor Restrictions

Functional Reporting of Expenses

31

Audited statements are required to allocate expenses in

three classes:

Program Services: activities that result in services being

distributed to beneficiaries

Management and General: oversight, business & general

financial management

Fundraising: activities that induce donors to contribute

May appear in the Statement of Activities or the Notes

Expenses

Expenses occur in the “Unrestricted” column

Program expenses are broken down by program

Identified program areas conform with the organization’s other

materials

ABC Organization


For the Year Ended December 31, 2009


Permanently Restricted Revenue and Other Support Unrestricted Total

Service revenues $4,982,631 $4,982,631

Grants $238,000 $151,790 $10,000 $399,790

Contributions $109,058 $77,201 $186,259

Special Events (less of direct costs of $19,399) $1,976 $1,976

Interest & Dividends $38,032 $38,032

Unrealized Gain $117,425 $117,425

Misc. $21,382 $21,382

Net Assets released from restriction $406,911 $(406,911) $-

Total Revenue $5,915,415 $(177,920) $10,000 $5,747,495

Operating Expenses

Program Services

Association Services $2,842,480 $2,842,480

Children & Teen Services $675,153 $675,153

Family Supoort $822,531 $822,531

Therapy $1,038,814 $1,038,814

Total Program Expenses $5,378,978 $5,378,978

Supporting Services

Management and general $188,896 $188,896

Fundraising $166,403 $166,403

Total Supporting Expenses $355,299 $355,299

Total Expenses $5,734,277 $- $- $5,734,277

Change In Net Assets $181,138 $(177,920) $10,000 $13,218 Net Assets Beginning of Year $2,348,570 $435,923 $206,465 $2,990,958 Net Assets End of Year $2,529,708 $258,003 $216,465 $3,004,176


Reports the cash generated and used during the year


35

The Cash Flow Statement looks at:

Where an entity obtained its cash and

Where it spent cash during a certain time period

Activity reported regarding:

Operations

Investing

Financing

Must disclose any non-cash activity such as acquisitions of equipment on finance

Where the Cash Came or Went O

pera

ting

Act

ivit

ies

converts the items

reported on the

statement of activities from the

accrual basis to cash

Inve

stin

g ac

tivi

ties

reports the purchase and sale of long-

term investments

and property, plant and

equipment

Fina

ncin

g ac

tivi

ties

reports on any loan

payments made or

credit secured

Misc. Organization for Good

Statement of Cash Flow

Fiscal Year Ended September 31, 2010

2010

Cash Flow from Operating System

Increase (decrease) in net assets $XXXX

Adjustments to reconcile decrease in net assets to cash

Depreciation $XXXX

Net realized gain on the sale of investments ($XXXX)

Net unrealized gain on sale of investments ($XXXX)

Change in opertating assets and liabilities

Reimbursable expenditures under contracts ($XXXX)

Contributions receivable $XXXX

Prepaid expenses and other assets $XXXX

Grants payable ($XXXX)

Accounts payable and accrued expenses $XXXX

Net cash (used in) provided by operating activities

Cash flows from investing activities

Purchase of investments ($XXXX)

Proceeds from the sale of investments $XXXX

Purchase of fixed assets ($XXXX)

Sale of fixed assets $XXXX

Use of restricted cash ($XXXX)

Net cash provided by investing activities $XXXX

Cash flows from financing activities

Payment of note payable ($XXXX)

Net cash used in financing activities ($XXXX)

Net increase in cash and cash equivalents $XXXX

Cash and cash equivalents

Beginning of year $XXXX

End of year $XXXX

Statement of Functional Activities

Detailed accounting of expenses by major expense area, broken

down by common expense type

Statement of Functional Activities

Required by GAAP for all voluntary health and welfare

organizations

Required by some watch dogs for all charities soliciting public

support

An important document for demonstrating priorities and

clarifying necessary expenses

ABC Organization

Statement of Functional Expense

For the Fiscal Year Ended December 31, 2009 Program Support 2009

Soup Kitchen Night Shelter Homeless

Intervention Total Program Administration Development Total Support Total Expenses

Compensation and related expenses

Salaries and Wages 62,000 45,000 36500 143,500 75,000 58,000 133,000 276,500

Payroll Taxes 11000 3000 2000 16000 13,000 6000 19,000 35,000

Fringe Benefits 17360 12600 10220 40180 21000 16240 37240 77,420

Total 90,360 60,600 48720 199,680 109,000 80,240 189,240 388,920

OTP

Outside services 12000 9000 12000 33000 0 36000 36000 69,000

Rent 22000 22000 0 44000 11000 11000 22000 66,000

Depreciation and amortization 20000 14000 0 34000 2000 3000 5000 39,000

Telephone 1000 1000 5000 7000 3000 4000 7000 14,000

Utilities 975 975 1950 400 400 800 2,750

Travel - - 1500 1500 1000 400 1400 2,900

Insurances 6500 8000 2300 16800 1200 7000 8200 25,000

Printing 900 250 1100 2250 11250 18000 29250 31,500

Equiptment rental 4500 0 0 4500 0 6500 6500 11,000

Postage 0 0 0 0 2400 3500 5900 5,900

Event Space Rental 0 0 0 0 0 22000 22000 22,000

Misc. 222 457 354 1033 354 555 909 1,942

Total 68097 55682 22254 146033 32604 112355 144959 290,992

Total Expenses 158,457 116,282 70,974 345,713 141,604 192,595 334,199 679,912

The Notes:

Significant Disclosure Guidelines

41

Description of the organization

Basis of Accounting (cash, accrual and modified accrual)

Fixed Assets

Debt

Temporarily and Permanently Restricted Net Assets

Related Party Transactions

Subsequent Events

Commitment and Contingencies

Going Beyond Compliance

Financial Statements are used by funders, reporters, and other stakeholders to make decisions

As such, Financial Statements should do more than conform with GAAP

Financial Statements should help the reader understand a charity’s mission, priorities and unique circumstances

Basic Sense:

Be Clear

Limit the use of acronyms or cryptic abbreviations

Examples

DCD, DHPD, DCDF, etc. may be obvious government funders to you or your client but not to most readers

BASP, APE, etc. may be what the organization calls the Boys After School Program, or the AIDS Prevention and Education program, but not every one will understand

Basic Sense:

Understand Materiality

Because nonprofits are often called on to meet a higher level of disclosure, “materiality” should be thought of differently

Example

$10,000 for a $175 Million organization may not seem material in the accounting sense of the term, but . . .

$10,000 to a donor might be . . .

Balance Sheet:

Net Asset Presentation

Net Assets can come in three forms:

Unrestricted



Break them out on the Balance Sheet

Balance Sheet:

Unrestricted Net Asset

Unrestricted Net Assets can take many forms, many of

which are less accessible for general use

Consider breaking out the following Unrestricted Net

Assets in the Balance Sheet:

Board Designated Reserves

Facilities and Equipment

Statement of Activities:

Program Expense

Present program expenses in a manner consistent

with the organization’s other materials

Examples If the organization says it has 5 program areas, the

financial statement should present expense for each of those areas

If the organization’s materials say it provides “Low cost or free legal, financial, and real estate services”, the financial statement should not say “Professional Services”

“Other program expenses” is never a descriptive or appropriate expense item

Statement of Activities:

Identify Non Program Costs Carefully

Think carefully about whether other “non-program”

expenses should presented separately:

Depreciation: Probably Not – it can be allocated to

Program, Admin, or Fundraising

Payments to Affiliates: May depend on what the

Affiliate and National Head does with the payments

Statement of Functional Expenses:

Clear Labels

Look to the IRS 990 Statement of Functional Expenses for sample wording and break down of expenses

When an organization has a unique expense, make sure it is called something that explains it

“Misc.” should be used for truly immaterial expenses and not include normal, expected expenses like salaries, rent, interest, etc.

The Notes:

Not Extra Credit but Essential

Note 1 is the first and only opportunity in the financial statement an organization has to present its mission and program in narrative form

Make sure this note is up-to-date and includes not just the organization’s

original programs but its current roster

Make sure that this statement is more than the perfunctory acknowledgement of 501(c)(3) status and incorporation

This statement should be given the same care the organization gives its annual report or website

The Notes:

More than a Template

Note 2 is typically the explanation of accounting practices

and methodology and comes straight from the audit firm

If the organization does not have temporary or permanently

restricted contributions or net assets, consider adding a

statement after the standard explanation

The Notes:

More is Better

If the organization has a unique situation, such as a

significant and non-repeating revenue source, include an

explanation in the notes

When describing related party transactions, provide

enough information for the reader to understand whether

or not this related transaction presents a conflict

Thank you!

Chris Dumas, [email protected], 707-812-1234

Special Thanks To Our Sponsors

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Telling Your Story in Numbers