"Oh, donít bother me," said the duchess, "I never could abide figures." Lewis Carroll, Alice in Wonderland
In my previous article we were having a scintillating discussion on rules impacting the presentation of your financial statements. As promised, I will continue this discussion and help you be more astute readers of these accounts of your previous yearís financial history.
I received a number of comments on my previous column relative to actual applicability of these rules to 501(c)(6) organizations. These standards, while primarily directed to (c)(3) Organizations, are strongly recommended to (c)(6) and the like. They allow one to present more clearly the activity of the organization.
Statement of Activity.
This statement shows all the organizationís FINANCIAL activity FROM THE BEGINNING TO THE END OF THE YEAR. The TITLE of this statement can be any of the following, including:
- Statement of revenue, Expenses and changes in Net Assets
- Statement of changes in net assets
- Statement of revenues and expenses
The title is less important than that this statement present all relevant activity for the period.
There should be two sections. One showing revenue and expenses while the other shows .. you guessed it.. changes in net assets.Net assets are the components of your equity section. Formerly fund balance accounts.
It is usually suggested that these two sections be shown as a combined statement in that changes in net assets usually presents few transactions.
Our next item is Statement of Functional \Expenses
As you know, Associations and Professional Societies can exist only so long as their membership believes that the services being rendered justify the dues and other payments being made. Since the members must see benefit for their money, the Association has an even greater need to communicate itís financial activity with clarity.
Functional reporting is a most effective way of communication since it requires the leadership (Board) to identify the programs of the Association and their related costs. While this is not required, once again, of (c)(6) organizations, perhaps you can see the value to yours.
SFAS 117 actually allows the detail of these expenses to be presented in the footnotes. However, it is recommended these details be shown in the primary statements where the reader can really see them and thereby more readily comprehend the workings of the organization . . . and their money! Statement of cash flow is relatively new to many organizations. It shows where the organization received and spent their money. These activities will be presented in three categories:
- operating cash flows
- financing CASH FLOWS, AND
- INVESTING CASH FLOWS
For profit businesses have been required to present this financial statement for a years under sfas 95 "Statement of cash flows." This is where guidance is provided in preparation of this statement.
There are two basic methods for preparing this statement: the indirect and direct methods. Basically, the indirect method starts with the excess of revenue over expenses and reconciles this number to operating cash flows. While the recommended method, direct, reports operating cash receipts and cash disbursements, directly adding them to arrive at operating cash flows. The direct method appears to be more easily understood by the reader of the financial statements.
Financial statement disclosures
These are the footnotes to your financial statements. They present information that is not readily apparent from reading the numbers. For instance, the form of exemption which applies to you (c6, c3, etc.). The explanation behind the restriction on funds, if any. Tax liability which may have been incurred.
When you have a moment, go back and re-read your "footnotes" and make sure they (1) clarify information about your organization (2) still apply, and (3) that there is nothing else you feel should be included here. Your accountant can provide you plenty of guidance on the pros and cons of including particular information and the appropriate wording.
You and your professional advisor and the readers of these statements are best served when you work together on this document to produce the best, most accurate account of the previous yearís activity.
Method of accounting
Many small and medium non profit organizations use the cash basis or some modification internally. Another of the requirements on the presentation of these financial statements is that the accrual method be used. This does not mean that one has to change their internal method of bookkeeping, only that a conversion calculation be made before presenting this information in the form of financial statements.
The last word . . .
SFAS 117 emphasizes the value of reporting on the organization as a whole with clarity and appropriateness and no longer mandates the traditional use of fund accounting. The goal, appears to be to provide greater understanding to the reader of these financial statements.
In a future article, we will conclude this discussion by covering considerations relative to the manner in which to disclose information about related or feeder corporations in these financial statements. As always if there are any questions or advice, feel free to contact me.