Interpreting Nonprofit Financial
Statements
By James L. White
Bernard & Franks, A Corporation of Certified Public
Accountants
Contact Information
 jimwhite@bernardfranks-cpa.com
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James L. White
4141 Veterans Boulevard
Suite 313
Metairie, LA 70002
(504)885-0170
Introduction to Nonprofits
 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
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501(c)(3)-Charitable organizations
501(c)(4)-Civic and Social Welfare
501(c)(6)-Business Leagues
501(c)(7)-Social and Recreational
Voluntary Health and Welfare
Organizations
 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.
Understanding Differences
Between Commercial and
Nonprofit Reporting
Objectives of Nonprofit Reporting
 Groups that external statements should address:
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Funders
Regulatory agencies
Governing boards
Beneficiaries of services
Employees
Creditors
National organization
Objectives of Nonprofit Reporting
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Communicate the use of resources
Identify the principal programs and costs
Communicate ability to carry out fiscal objectives
Other objectives include:
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Amount and nature of assets, liabilities and net assets
Inflows and outflows of resources
Factors that affect liquidity
Service efforts of the organization
Other General Financial Reporting
Issues
 Comparative financial statements
 Prior years
 Budget
 Fund accounting
 Not required by GAAP
Interpretation Model
Interpretations
Observations based on
comparisons, analytical
reviews and discussions
Knowledge of GAAP
Significant Differences Between For Profit and
Nonprofit Financials
Three “bucket” reporting
Unrestricted
Unrestricted
Temporarily
Restricted
Permanently
Restricted
Significant Differences-Three Buckets
 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-Revenue
Recognition
 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. For example, an unconditional pledge is recorded
as revenue when delivered to nonprofit.
 Must determine if a contribution (gift) or exchange
transaction.
Significant Differences-Terminology
 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.
Interpreting Nonprofit
Statement of Financial Position
To Classify or Not to Classify?
 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.
Cash
 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
Investments
 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.
Endowment Investments
 Consider restrictions-Donor requirements may produce longterm 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 Funds-UPMIFA
 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.
Endowments-UMIFA
 Requires the historical dollar amount of an
endowment must be preserved.
 Absent donor restriction net appreciation (realized
and unrealized) is spendable.
Example
Permanently restricted contribution
80,000
Year 1
Income, restricted by donor-10%
8,000
Expended-5%
4,000
Year 2
Income, 40% decline
Expended-5%
(33,600)
4,200
Year 2 Endowments
Activities
Contribution
Investment income
Transfer
Unrestricted
(29,600)
(29,600)
Expenses
Beginning net assets
Totals
Temporarily
Restricted
(4,000)
(4,000)
4,200
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4,000
(33,800)
Permanently
Restricted
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80,000
80,000 46,200
Promises to Give
 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
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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.
Inventory Issues
 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.
Collections of Items
 Collections are defined as works of art, historical treasures,
that are1.
2.
3.
held for public display, education, or for research.
protected, cared for and preserved, and
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
Interpreting Nonprofit
Liabilities
Deferred Revenues
 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.
Refundable Advances
 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.
Grants Payable
 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.
When Is Receipt of a Contribution a
Liability?
 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.
Interpreting Net Assets
Net Assets
 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 donorimposed time or use restrictions.
 Permanently Restricted-Restricted by donor or law to be
maintained for perpetuity.
Interpreting Statement of
Activities
Revenue Recognition Issues
 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.
Exchange vs. Contribution
Factors
Nonprofit’s Intent
Exchange Transaction
Contribution
Organization is seeking
Organization is soliciting a
resources in exchange for contribution.
benefits.
Provider's intent
Provider transferring
Provider is making a
resources in exchange for contribution
specified benefits.
Methods of delivery
Specified by the provider. Discretion of the
nonprofit.
Provider pays an amount Provider determines the
equal to the value
amount of payment.
provided by the
organization.
Determination of
payment amount
Penalties assessed fails to Nonprofit organization is Nonprofit organization is
make timely delivery of penalized for
not penalized for
assets
nonperformance.
nonperformance.
Delivery of assets
Assets are delivered to
provided by the nonprofit the provider others
closely connected to the
provider.
Assets are to be delivered
to individuals or
organizations other than
the provider.
Donations of Materials
 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.
Donation of Facilities
 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.
Undiscounted Discounted
Year 1
10,000
10,000
Year 2
10,500
9,000
Year 3
11,000
8,730
Year 4
11,500
8,450
Year 5
12,000
8,170
Total
55,000
44,350
Unconditional Promises to Give
Unamortized discount
Temporarily restricted contribution
Next year
Rent expense
Unconditional Promise
Unamortized discount
Temporarily restricted contribution
Transfer-Temporarily restricted
Transfer-Unrestricted
55,000
(10,650)
44,350
10,000
10,000
3,530
3,530
10,000
10,000
Donation of Services
 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.
Membership Fees
 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.
Reclassifications
 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.
Expenses
 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
 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
 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.
Allocations
Important for nonprofit to have an allocation plan. A general
plan would be as follows:
Account
Allocation Method
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Salaries and wages
Employee benefits
Office rent
Utilities
Building supplies
Telephone
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Time sheets
Based on salaries and wages
Square footage
Square footage
Square footage
Number of phones
Fundraising-Joint Costs
 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.
Three Bucket Reporting
 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
Interpreting the Statement of
Functional Expenses
 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 Cash
Flow
 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 Nonprofit Disclosures
 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
 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.
Assessing When to Include the Financial Results of
An Entity in the Financial Statements
1. Controlling financial interest through direct or indirect ownership of a majority
voting interest generally should consolidate.
2. An organization that holds less than a majority voting interest in the investee (that
is, it owns 50% or less of the voting stock) and can exercise significant influence
over the operating and financial policies of the investee should use the equity
method to report the investment. If the organization does not have significant
influence, it is required to report the investment at fair value if the equity securities
have readily determinable fair values. If not, it is reported using the guidance for
other investments in FASB ASC 58-325.
3. An organization that is a general partner in a limited partnership or similar entity
should consolidate the investee if it controls the partnership. FASB ASC 81020 provides guidance for determining whether the general partner has control. If
the organization does not control the partnership, it should use the equity method
to report the investment. The organization also may be permitted to elect to
report the investment at fair value.
4. An organization with more than a minor interest in a real estate partnership, real
estate limited liability company, or similar real estate entity should use the equity
method to report its investment. However, the investee should be consolidated if
the interest is considered a controlling interest. The organization also may be
permitted to elect to report the investment at fair value.
Using Financial Ratios in
Interpreting Financial Statements
Financial Ratios For Nonprofits
FINANCIAL RATIO
MEANING
IF HIGH
IF LOW
Indicates good
financial health,
however if very high
organization could
look too rich.
Again measures
overall financial
health of the
Organization
Organization is not in
good financial
standing.
Statement of
Financial Position
Net assets (excess of
assets over liabilities)
A measure of reserves
available to the
organization-net worth.
Ratio of net assets to
total expenses.
Organizations should
strive for a ratio of 50 to
100%
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.
Low % indicates
Organization should
increase retained
profits or poor
financial health.
Organization has
Organization may
good working capital have inadequate cash
to meet immediate
and working capital
needs of the
to finance the
operation.
operations.
Financial Ratios For Nonprofits
FINANCIAL RATIO
MEANING
IF HIGH
IF LOW
Operations are
profitable. If too high
Organization may not
be providing all
services it could.
Should be close to
budget.
A measure that funds
are not being used to
support mission of the
Organization
Unprofitable
operations will lead to
financial difficulties if
continued.
Could indicate too
much risk.
Organization may not
be generating as much
income as possible
from investments.
Indicates efficient
fundraising effort,
however if too low
could indicate lack of
aggressive fundraising.
Statement of Activities
Excess of revenues over
expenses
Indicates if operations are
profitable.
Comparison to budget
Assesses the Organization’s
ability to plan.
Measures efficiency of
Organization; how much of
the funds are used for
support of the
Organization. A ratio under
25% is good.
Gauges effectiveness of
investment management.
Ratio of supporting
expenses to total
expenses
Investment income to
total investments.
Ratio of fundraising
expenses to contributions
and funds raised.
Efficiency in raising money.
Fundraising efforts
may be inefficient.
Should be close to
budget.
Indicates operational
efficiency
Sample Report to Management
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)%
Presenting Financial Statements to
Boards, Members and Management.
Myth Busting
Nonprofit
Stockholder,
Owner
Dividends,
Investment
Returns
$
Commercial
Enterprise
No Profit
Board,
Organizers,
Officers
No return
of profit
Nonprofit
Organization
Interpreting Financial Results for
Management
 Understand that 90% if your audience panics when
reviewing columns of numbers.
 Use tables and graphs when practical.
Sample Chart Report
HOURS WORKED TO BUDGET
For The Year
Hours For The Year
20,000.00
15,000.00
10,000.00
Hours Worked
Budget hours
5,000.00
0.00
Hours Worked
Program
Sample Table Report
HOURS WORKED COMPARED TO BUDGETED HOURS FOR THE YEAR
Program Program Program Program Program Program Program Program
1
2
3
4
5
6
7
8
Total
Hours Worked 6,039.35 8,463.99 13,289.88 15,408.01 17,646.55 6,572.92 7,018.64 6,183.03
74,439.34
Budget hours 6,377.54
74,709.92
9,634.15 11,847.23 15,472.15 18,848.31 7,409.77 5,120.77 6,438.92
Sample Graph Report
CENSUS RATES FOR GROUP HOMES(DAYS)
For The Year
2,000.00
1,800.00
1,600.00
1,400.00
1,200.00
1,000.00
800.00
600.00
400.00
200.00
0.00
For Year
Budgeted
Program 1
Program 2
Program 3
Program 4
Program 5
Program 6
Simple Pictures and Explanations
of Basic Statements
Overview - Statement of Financial
Position
 Assets
 Liabilities
 (Resources of the
Organization)
 (Amounts owed
to outside
creditors)
=
+
 Net Assets
Overview-Statement of Financial
Position
 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 Activities
+ 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
 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 Cash Flows
+ 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
 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.
Interpreting Nonprofit Financial
Statements
By James L. White
Bernard & Franks, A Corporation of Certified Public
Accountants