CPAs & ADVISORS experience direction // FINANCIAL STATEMENT ANALYSIS Presented by Rick Wittgren, CPA, Partner & Daniel Waninger, CPA, Senior Manager
OVERVIEW First Session (1:45 to 3:00pm) – Financial Statement Basics Types of Reports Statement of Financial Position Net Asset Classification Statement of Activities Revenue Recognition Expense Reporting Report Requirements compared to Grant Size Break (15 minutes) Second Session (3:15 to 4:30pm) – Beyond the Basics Trend data, ratios and other indicators Characteristics of financially healthy nonprofits 2 // experience direction
TYPES OF REPORTS / FINANCIAL STATEMENTS Internal Financial Statements Least Assurance Compiled Financial Statements Level of Assurance Reviewed Financial Statements Greatest Audited Financial Statements Assurance 3 // experience direction
FORM 990 An annual reporting return that certain tax-exempt organizations must file with the IRS. It provides information on the filing organization's mission, programs, and finances Who is required to file Most tax-exempt organizations, with the exception of churches and state institutions All 501(c)(3) private foundations, regardless of income Source: guidestar.org 4 // experience direction
FORM 990 (CONT.) Who is not required to file Nonprofits that have not received tax-exempt status from the IRS Most faith-based organizations State institutions Subsidiary organizations covered under a group return filed by the parent organization Guidestar, Charity Navigator and other watchdog groups Source: guidestar.org 5 // experience direction
990 INSIGHTS 990 is a public document, available for viewing at www.guidestar.org Areas on which to focus Part I, question 1 – mission statement Part III, question 4 – program service accomplishments Part VI, section A, question 5 – did the organization become aware during the year of a significant diversion of the organization’s assets? Part VI, section B – policies Part VII, section A – officers, directors, trustees, key employees and highest compensated employees Officers – Executive Director – must disclose their salary Five highest compensated employees greater than $100,000 6 // experience direction
BUDGETS What is a budget? Forecast of revenue and support and cost and expenses for a period of time Forward looking Why do organization’s budget? How reliable is a budget? What level of assurance comes with a budget? 7 // experience direction
STATEMENT OF FINANCIAL POSITION Nonprofit balance sheet Reports asset, liabilities and net assets of organization at a point in time Net assets broken into three classes Unrestricted Temporarily restricted Permanently restricted 8 // experience direction
STATEMENT OF ACTIVITIES Non profit income statement Reports results from operations for a period of time Typically broken into three columns by net asset classification Unrestricted Temporarily restricted Permanently restricted Measure of operations? “Above the line” vs “below the line” 9 // experience direction
REVENUE RECOGNITION Contribution vs. exchange transaction vs. agency transaction Contribution – revenue recognized upon notification Exchange transaction – revenue earned as services are performed Agency transaction – revenue is not recognized AICPA Not-for-profit Audit and Accounting Guide Flowchart 5-1 Contributions - unconditional vs. conditional Unconditional – revenue recognized upon notification Conditional – revenue recognized upon satisfaction of condition ASC 605-25-8 through ASC 605-25-15 10 // experience direction
EXPENSE REPORTING Functional classification – grouping expenses according to the purpose for which the cost occur Program expenses Supporting services Management and general Fundraising Natural classification – grouping expenses according to the kinds of economic benefits received in incurring those expenses Salaries Employee benefits Rent Supplies Utilities 11 // experience direction
FUNCTIONAL EXPENSES - EXPENSE ALLOCATION Allocation of expenses to the agency between program activities and supporting activities Direct allocation – expenses specifically attributable/identifiable to a program or support activity Program manager who spends all of their time on the program they manage Indirect allocation – method for allocating expenses which are not specifically attributable to a program or support activity Depreciation expense, Executive Director’s salary Common allocation methods Estimation of time spent on each functional category Percentage of total salary expense Square footage occupied 12 // experience direction
Report Requirements compared to Grant Size What grant reporting is typically required of recipients? How does the reporting align with the significance of the grant? What if a grant is significant to one recipient organization’s operations, but not to another recipient organization’s operations? Should the reporting requirements be scaled to fit the grant size or organization size? Oversight of reporting requirements 13 // experience direction
QUESTIONS ? 14 // experience direction
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TREND ANALYSIS Practice of accumulating information over a period of time to analyze trends over the respective period Historical trending Prospective trending Allows decisions makers and others the ability to “see the forest” Can reveal trends that may be unforeseen when analyzing current period financial statements or even when analyzing current to prior year financial statements Useful in strategic planning 16 // experience direction
RATIOS AND OTHER FINANCIAL INDICATORS Another tool to analyze financial information and financial health of an organization As with trending, can provide useful information on trends of the organization and other insights Can be a tool for comparison to similar agencies Can help financial statement users better understand the financial results / financial health of the agency 17 // experience direction
COMMON STATEMENT OF FINANCIAL POSITION RATIOS Current ratio Days cash on hand Debt ratio Days in accounts receivable ratio Days in accounts payable ratio Net asset ratio Expendable financial resources Net Investment in plant 18 // experience direction
COMMON STATEMENT OF ACTIVITY RATIOS Income reliance ratios Expense composition ratios Functional expense ratio Fundraising efficiency Return on investments Gifts percentage 19 // experience direction
CHARACTERISTICS OF FINANCIALLY HEALTHY NONPROFITS Healthy Statement of Financial Position Indicators Sufficient liquid assets to fulfil temporarily and permanently restricted net assets Positive unrestricted net assets Ability to access debt, if necessary, for short-term needs Sufficient unrestricted reserves to weather unforeseen financial challenges Operating reserve policy Ability to add to these reserves in good years 20 // experience direction
CHARACTERISTICS OF FINANCIALLY HEALTHY NONPROFITS Healthy Statement of Activity Indicators Diverse mix of revenue and support sources, not overly reliant on certain funding sources Consistently positive “operating” income Ability to meet mission objectives while maintaining a balanced budget Ability to respond quickly to budget challenges Ability to control spending and adhere with approved budget 21 // experience direction
CHARACTERISTICS OF FINANCIALLY HEALTHY NONPROFITS Organizational Indicators of a Healthy Nonprofit Proper tone at the top Appropriate governance policies Diverse board with backgrounds that can contribute positively to the organization Proper staff training consummate with the organization’s mission Appropriate internal controls Clean management letters if applicable 22 // experience direction
PROPOSED CHANGES TO THE NOT-FOR-PROFIT REPORTING MODEL Financial Accounting Standards Board (FASB) and its Not-for-Profit Advisory Committee has proposed several changes to the reporting model Changes to Net Asset Classification Replace Unrestricted, Temporarily Restricted and Permanently Restricted net asset classifications Convert to net assets with donor restrictions and net assets without donor restrictions Disclose purpose and amount of board designations (which are not donor restricted) 23 // experience direction
PROPOSED CHANGES TO THE NOT-FOR-PROFIT REPORTING MODEL (CONT) Tentative decision to define an Operating Measure Mission dimension – based on whether resources are from or directed at carrying out an organization’s purpose Availability dimension - based on whether resources are available for current period activities, reflecting both external limitations and internal actions of an organization’s governing board FASB also supports to present an intermediate measure based on all legally available mission-related revenues before reductions for amounts designated by the governing board for use in future periods, rather than only the net of those amounts. That presentation also would include amounts of previously unavailable resources the governing board made available for use in the current period. 24 // experience direction
PROPOSED CHANGES TO THE NOT-FOR-PROFIT REPORTING MODEL (CONT) Reporting Cash Flows Requires direct method cash flow Other changes to the classification of various items on the statement of cash flows 25 // experience direction
QUESTIONS ? 26 // experience direction
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