By Carolyn S. Sechler, CPA
If you are not yet familiar with the fascinating details of Financial Accounting Standards Board provisions, this might be a great time to familiarize yourself with FASB 117, FINANCIAL STATEMENTS OF NOT-FOR PROFIT ORGANIZATIONS. These are the "rules" we CPA's must follow in the preparation and presentation of your financial statements.
FASB 117 was issued in June 1993 and had an effective date for fiscal years beginning after December 15, 1994. For those not-for profit organizations that have less than $5 Million in total assets (what you own) and less than $1 Million in annual expenses, the effective date was delayed until fiscal years beginning after December 15, 1995. Therefore, all Organizations are now supposed to be in compliance with this provision.
This FASB now requires a complete set of financial statements to include:
- Statement of Financial Position
- A Statement of Activities
- A Statement of Functional Expenses (for Voluntary Health and Welfare Organizations and encourages it for other not-for-profit organizations)
- A Statement of Cash Flows
- Financial Statement Disclosures
These are the precise titles you should be seeing on your current financial statements. Balance Sheet and Income Statement are not appropriate. There are also many new terms you may find in the body of these "new" financial statements and related disclosures you may find unfamiliar.
In this month's scintillating installment we will review the Statement of Financial Position (a not-for -profit form of Balance Sheet). Basically this statement must include the amounts of each of the following classes of assets, based on the existence or absence of donor-imposed restrictions:
- Temporarily Restricted Net Assets ~ The part of the net assets resulting primarily from the receipt of contributions whose use by the organization is limited by donor-imposed stipulations that either expire by passage of time or can be fulfilled and removed by actions of the organization pursuant to those stipulations. (Example: Donor designates $10,000 of contribution be temporarily set aside - restricted - for acquisition of services of a consultant to assess technology needs of the organization. Earmarked funds, so to speak).
- Permanently Restricted Net Assets ~ The part of the net assets of a not-for-profit organization resulting from contributions whose use by the organization is limited by donor-imposed stipulations that neither expire by passage of time nor can be fulfilled or otherwise removed by actions of the organization. (Example: John Smith Estate leaves $50,000 to the organization with the stipulation that the annual interest income earned by provided as scholarship funds each year to students entering college to study genetic research).
- Unrestricted Net Assets = The part of net assets of a not-for-profit organization that is neither permanently restricted nor temporarily restricted by donor-imposed stipulations. In other words, everything else.
Whoa, you might say. What the heck is NET ASSETS? Simply put, this is the net result of subtracting what you owe (your liabilities) from what you own (your assets). In the for-profit entity this is commonly referred to as "equity."
Another way to look at this measure is that it shows you what would remain after all obligations were serviced if you had to wind the organization down as of the date of the financial statement. There you go, clearer than mud, right?
This portion of the provision serves to categorize the components of this measure of your "equity" and clearly present to the reader of the financial statement, what is available vs. restricted for future operations.
Either the Statement of Financial Position or the notes must provide information on liquidity, financial flexibility (i.e. restrictions) and interrelationship of assets and liabilities. The information should be aggregated into reasonably homogeneous groups. Cash or other assets that are received with donor-imposed restrictions should not be classified with cash or other assets that are unrestricted and therefore available for current use.
Information about the nature and amount of different types of permanent and temporary restrictions must be included in the financial statement disclosures. These disclosures must distinguish between permanent restrictions of holdings of assets which must be used for a specific purpose, preserved or not sold and assets donated with the provision that they be invested to provide a permanent source of income (permanent endowment).
Board designated endowments of unrestricted assets need to be classified with unrestricted net assets but disclosed either in the body of the financial statement or in the notes as board designated. For instance, the board may decide that portfolio earnings be used for replacement of equipment thereby designating these funds for a particular purpose.
In becoming well versed in the components within FASB117, your comprehension of your financial statements will increase. In addition, you will find them to be a much more valuable management tool.
This exercise can also enhance your relationship with your professional advisor. Everybody wins! The more we understand about the "rules of the game" and goals of the organization, the better we can support one another as members of the team.
Hopefully this summary has given you food for thought and identified some questions for you to ask your practitioner. In future articles I will cover the remaining components of the financial statements. Feel free to contact me if I may assist you in clarifying any of this material.
Also, let me know if there are subjects you would like to see addressed to better support you in this specialized area of leadership and management of exempt organizations.