Telling Your Story in Numbers

Telling Your Story in Numbers: Getting the Most out of Audited Financial Statements August 18, 2010 Special Thanks To Our Sponsors

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Today’s Speakers Jennifer Ahern Lammers The Philanthropy Hub www.philanthropyhub.com jlammers@philanthropyhub.com Hosting: Sam Frank, Synthesis Partnership Assisting with chat questions: Chris Dumas, FirstGiving

Telling Your Story in Numbers Making the most of your Audit August 18, 2010 Prepared By: Jennifer Ahern Lammers, MPA, CNAP Prepared For: Nonprofit Webinars – Wednesday Webinar Series

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) Outlines standards for the presentation Statement of Cash Flows of the Statement of Cash Flows SFAS #116 (ASC 958) Outlines standards for the valuing and Accounting for recording of contributions received Contributions Received & and made by an NFP Contributions Made SFAS #117(ASC 958) Recommends format & content for Financial Statements of financial statements of an NFP Not-For-Profit Organizations 8

More Relevant SFAS’s Statement Purpose SFAS #124 (ASC 958) Outlines standards for recording Accounting for Certain investments in the financial statements Investments Held by Not-for- Profit Organizations SFAS #157 (ASC 820) Defines how to measure fair value Fair Value Measurements 9

SFAS 116 (ASC 958) Definitions Contribution: An unconditional, non-reciprocal transfer of an asset or cancellation of a liability to a not-for- profit organization Donor-Imposed A transfer based on a future or uncertain event, Condition: the occurrence or non-occurrence of which will dictate whether the asset is retained by the not- for-profit organization 10

SFAS 116 (ASC 958) Definitions (cont’d) Donor- Imposed A limitation on the use of an asset placed by Restriction: the donor Promise To Give: An agreement to contribute an asset; it will be entered into the accounts if verifiable documentation exists 11

SFAS 117 (ASC 958) Classifying Contributions Unrestricted: Contributions that are free of donor restrictions on their usage Temporarily Contributions that have donor imposed restrictions restricted: and may be removed by: (1) the passage of time or (2) an act of the organization Permanently Contributions with restrictions that can never be restricted: removed 12

SFAS 117 (ASC 958) Contributed Services Recognition  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 13

According to SFAS 117 (ASC 958): 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 Cash Flows  Statement of Functional Expenses, if required, for Voluntary Health and Welfare organizations  Accompanying Notes to the financial statements 14

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 Disclaimer of Unqualified Qualified Adverse Opinion • Considered a • Statements • Statements do • “No opinion” “clean have one or not conform on statements opinion” more material to GAAP • Auditors were • States that problems • Readers are unable to statements are • Raises provided “no apply auditing presented awareness of assurance” on standards fairly issues the figures • Very unusual, rarely issued

Other Options • Step down from a full audit • CPA provides only limited assurances based on staff inquiries Reviews and spot checks of procedures • Further step down Compilations • CPA provides no assurance as to the validity of the numbers • Should follow GAAP (FSB 116 and FSB 117) format Internally • If prepared correctly may be more useful than a compilation Generated

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 • Most liquid first • Cash & Cash Equivalents, Contributions Receivable, Assets Investments, Prepaid Expenses, Fixed Assets, etc. • Due in 12 months or less first, then longer term • Line of Credit, Accounts Payable, Accrued Expenses, Long Liabilities Term Debt, etc. • Unrestricted (includes fixed assets and any board reserves) Net Assets • Temporarily and Permanently Restricted

Content and Presentation  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 22

Net Assets  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 23

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

Statement of Activities  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 Type of change Comment Revenues Shown gross, under each category of net assets, unless incidental in nature Expenses Decreases to unrestricted net assets, presented on a functional basis Gains and Losses Across all categories, based on nature Reclassification Transfers assets from temporarily restricted to unrestricted based on satisfaction of those restrictions 27

Presentation  Revenues are presented according to donor restriction:  Unrestricted  Temporarily Restricted  Permanently 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

Donor Restrictions  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

Functional Reporting of Expenses  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 31

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 Statement of Activities For the Year Ended December 31, 2009 Temporarily Permanently Revenue and Other Support Unrestricted Restricted Restricted 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

Statement of Cash Flows Reports the cash generated and used during the year

Statement of Cash Flows  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 35

Where the Cash Came or Went converts the reports the reports on items purchase and any loan Operating Activities Financing activities Investing activities reported on sale of long- payments the term made or statement of investments credit activities and secured from the property, accrual basis plant and to cash equipment

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 Homeless Total Soup Kitchen Night Shelter Intervention 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  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 41

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  Temporarily Restricted  Permanently Restricted  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, Chris@NonprofitWebinars.com, 707-812-1234 Special Thanks To Our Sponsors

Telling Your Story in Numbers

by NonprofitWebinars.com on Aug 24, 2010

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