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Praise for How to Read Nonprofit Financial Statements

How to Read Nonprofit Financial Statements: A Practical Guide equips nonprofit board members, the senior management team, and key stakeholders with the information they need to effectively understand their organization's financial statements. Through detailed, line-by-line analysis of each part of a financial statement, the authors have created a premier source of information that is easy to understand regardless of professional background.“

Michael Bauer, Chief Financial Officer, World Wildlife Fund

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Preface

If you are familiar with the earlier versions of this publication, you know how valuable a resource this book is to readers of nonprofit financial statements. This updated edition of the publication has been expanded and incorporates even more information that will make this a must-have resource.

This edition has been updated to reflect the new requirements of the Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities, which will be effective for most nonprofits for fiscal years beginning after December 15, 2017. The provisions of the ASU can be adopted early if a nonprofit chooses to do so.

The illustrations in this book are designed to provide readers with both the format of nonprofit financial statements before the adoption of ASU 2016-14 as well as the format once a nonprofit adopts the provisions of ASU 2016-14. The illustrations highlight best practices as well as the required changes outlined in the ASU. These illustrations provide a great resource for those trying to read and interpret nonprofit financial statements as well as for those who are responsible for designing and preparing nonprofit financial statements.

A new chapter has been provided that discusses reserves. This is a challenging topic and one that many organizations struggle with, and unfortunately there isn't a single, definitive answer. There are certain considerations and other factors, however, that an organization should analyze in making an assessment regarding appropriate reserves.

This edition provides a new section discussing general financial analysis that provides greater insight into what readers of nonprofit financial statements should be looking for to enable them to satisfy their fiduciary responsibility whether they are a board member, audit committee member, advisor, or internal CEO or CFO. The section also provides some of the more common ratios that can be used to obtain information about the financial condition of a nonprofit organization. This information should be used by all readers and preparers of nonprofit financial statements to ensure the financial statements are designed to provide an accurate depiction of the nonprofit organization's financial position, activities, and results.

This edition also includes a new chapter on benchmarking to assist nonprofits in making comparisons to other nonprofit organizations.

A glossary is included that will assist readers in identifying the meaning of specific terms used in nonprofit accounting and financial statements that can be referred to time and time again.


Learning Objectives

Every educational effort should have a specific focus. This text has been designed so that once you have completed it, you will be able to:


Introduction

This book is designed to help you understand the financial statements of nonprofit organizations. If you are a nonprofit executive or volunteer leader who is not familiar with the formats and language of financial reports, or if you simply wish to brush up on your skills, you will find that this book has been prepared especially for you.

Understanding financial information is vital to managing a successful nonprofit organization. As a nonprofit executive, you know this to be true. If you are a volunteer leader and wish to fulfill your fiduciary responsibility to guide your organization, it is equally important. The best leaders do not lead without this knowledge.

The text is intended to provide you with knowledge that you can apply in carrying out your roles and responsibilities in your organization. To that end, you are encouraged to work through the exercises presented to gain insight into the principal concepts surrounding nonprofit financial statements. The exercises reinforce the concepts presented.

The requirements of nonprofit financial reporting in general have grown increasingly complex over the years. The purpose of financial reporting is to provide the financial story of the organization. With the issuance of the Financial Accounting Standards Board (FASB) Accounting Standards Update 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities, the requirements for how information is presented in nonprofit financial statements have been significantly updated. This edition has been updated to reflect these new requirements and provides explanations and illustrations of many of the new financial statement presentation requirements.

Also, many nonprofit organizations have activities, such as significant federal funding, that require unique reports. These reports and the requirements have also changed as a result of the Office of Management and Budget issuing Title 2 Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). As a result, special materials have been added near the end of the text to provide those interested with the most important information pertaining to these activities and the updated reporting.

A glossary is included at the end of the text to familiarize you with both the common terms associated with nonprofit financial statements and to provide you with a resource for the future. Understanding the language of nonprofit organizations is essential to understanding your organization's financial statements.

By beginning to read this text, you have taken an important first step in increasing your capabilities. When you have finished the text, you will have accomplished something truly worthwhile.

Chapter 1
Why You Need to Understand the Update to the Nonprofit Reporting Model

Anyone who is responsible in some way for the welfare of a nonprofit organization, whether as a leader, member, donor, manager, or staff, needs to be well aware of recent changes in rules affecting all nonprofit financial reporting. The Accounting Standards Update (ASU) 2016-14 will change the way nonprofits classify net assets and prepare their financial statements. While the changes do not substantially alter a nonprofit's financial statements, they are of sufficient significance that they must be understood by those with a fiduciary responsibility or simply an interest in the well-being of the entity.

This book has been prepared for any and all readers. It provides definitions of common accounting jargon and provides numerous examples of financial statements reflecting both the old standards and the new ones. We applaud you for investing your time to understand what is new in our nonprofit world.

Chapter 2
Why Update the Nonprofit Reporting Model?

The current reporting model for nonprofit organizations has been in existence for more than 20 years. Many stakeholders raised the question as to whether a refreshed model would be more useful to users of nonprofit financial statements. The Financial Accounting Standards Board (FASB) analyzed the situation based on input from the nonprofit industry and concluded that improvements were in order. They then added the project Financial Statements of Not-for-Profit Entities to its agenda, which ultimately led to the issuance of Accounting Standards Update (ASU) 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities.

The goals of ASU 2016-14 are to improve the overall understandability, comparability, and usefulness of nonprofit financial statements. The ASU is not an overhaul but an update of existing standards for nonprofit organizations. The update to the current presentation of the net asset classification requirements is one major component of the project. Another aspect of the project was to work to improve the information provided by nonprofits to allow readers to be able to assess the liquidity, financial performance, and cash flows of nonprofit organizations.

Thus, the ASU is aimed at revising current reporting practices so that they are clarified to allow for clearer reporting on how restrictions on a nonprofit's resources affect liquidity. The ASU requires enhanced disclosures about financial assets and the extent to which they are not available in the near term because of limits imposed by donors, laws, and internal governing board actions. These expanded disclosures should assist users of nonprofit financial statements in assessing an entity's liquidity.

ASU 2016-14 affects substantially all nonprofit entities as defined in the FASB Accounting Standards Codification (ASC). Based on the ASC, nonprofit entities are defined as “an entity that possesses the following characteristics, in varying degrees, that distinguish it from a business entity: (a) contributions of significant amounts of resources from resource providers who do not expect commensurate or proportionate pecuniary return, (b) operating purposes other than to provide goods or services at a profit, and (c) absence of ownership interests like those of business entities.” While the first or second characteristic may or may not apply to your organization, the third most certainly should cover the industry as a whole.