understanding nonprofit financial statements · pdf file21 roles and responsibilities...
TRANSCRIPT
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Presented by:
Kelli D’Amore, Principal [email protected]
Melissa Biron, Manager [email protected]
Understanding Nonprofit
Financial Statements
Today’s Goals
Understand the financial statements used by NPO’s
Reporting requirements / options – audit v. review v.
compilation
What options do organizations have? These are
YOUR financial statements!
Understand what they tell us (and don’t) – focus
areas
Budgeting pitfalls
What’s new?
Tips for management & board members
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Poll the Audience!
PURPOSE?
Tell a story about the organization
Picture of where you are
Picture of what happened – financially
Picture of how you got there
Where you are going?
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Key considerations
Who will be reading the statements?
What will they be looking for?
What do you want them to see?
What should you explain further?
Audits, Reviews & Compilations
Audits
Highest level of service
3rd party confirmation & testing of transactions
Requires independence from CPA
Required in NH if annual revenues > $1m
May be required by users
No “abridged” version of an audit
NPO’s with annual revenues > $500k require
GAAP statements (not an audit)
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Audits, Reviews & Compilations
Reviews
Primarily analytic and predictive procedures
Independence required by CPA
No third party confirmation
Compilations
Internal financials dressed up
No testing performed on figures
Independence not required
(Handout)
Considerations
Needs of users
Need for comparative statements
Alternatives to full disclosure GAAP F/S
Independence requirements (audit/review)
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What are these things called
financial statements?
Statement of Financial Position
(for profit equivalent = Balance Sheet)
Statement of Activities
(for profit equivalent = Income Statement)
Statement of Cash Flows
Other Statements
Statement of Changes in Net Assets
(For profit equivalent to Net assets = Retained
earnings)
Statement of Functional Expenses
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Relationships
Statement of Financial Position – assets and
liabilities at a single point in time
Statement of Activities – financial activity over
a period of time
Cash flows – sources and uses of cash over
a period of time
Statement of Functional Expenses –
allocation of expenses between
Program/Mgmt & General/Fundraising
Statement of Financial Position (Balance Sheet)
Snap shot – single point in time
Assets of the organization – what it owns
Liabilities of the organization – what it owes
to others
Net assets – what is left over
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Assets
Current assets
Property, plant and equipment
Investments
Other assets
Liquidity
Classified vs. non-classified statement
Investments - Endowments
What is an endowment?
Spending Policy
Investment Policy
Gift Acceptance Policy
What will you accept?
What restrictions will you accept?
What level is required for a named fund?
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Basic Principles
Cost vs. fair value
Conservatism
Accrual vs. cash basis
Liabilities
Current liabilities
Accruals
AP
LOC
CMLTD
Long-term liabilities
LTD
Deferred revenue
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Net assets
Unrestricted
Temporarily restricted
Permanently restricted
Will discuss later
Statement Examples (handout)
Client A
Classified, comparative
GROUP PROJECT / DISCUSSION
1. What questions would you ask?
2. What additional information would you request?
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Statement of Activities
Activity over a period of time – one year, one
month, one quarter
Income statement – revenue and expenses
Unrestricted
Temporarily restricted
Permanently restricted
Format options – handouts later
Restrictions
Time restrictions
Purpose restrictions
Restrictions always come from the donor
Board designated (NOT board restricted)
Release from restriction
Donor (and development) education
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Revenue
Variety of sources
Gifts
Grants (a whole separate day)
Operations
Sale of merchandise
Investment appreciation and I&D
In-kind
Unrelated business
Expenses
Program
Fundraising
Administration
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Change in net assets
“Profit”
Reconciliation of net assets at beginning and
end of the year (by restriction)
Statement of Cash Flows
Cash activity over a period of time
Cash flow provided by/used in operations
Cash flow provided by/used in investing
activities
Cash flow provided by/used in financing
activities
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Operating cash flow
Reconciles change in net assets (“profits”)
with change in cash
Effect of changes in current assets and
currents liabilities
Do you have a positive cash flow from your
core business or are you financing
operations?
Investing activities
Effect on cash flow of buying and selling:
Investments
Property, plant and equipment
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Financing activities
Effect on cash flow from:
Borrowing
Repaying debt
Statement Examples (handouts)
Client B
Unclassified, comparative, level of service
Client C
Classified, fund presentation
GROUP PROJECT/DISCUSSION
1. What questions would you ask?
2. What additional information would you request?
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Other Issues
Financial statement footnotes
Does wording make sense?
Explanatory items (strategic plans)
Included as material weakness requirement
for financial expertise
Financial statements vs. 990
Analytic Tools - Profitability
Components of income statement
Revenue sources
Operations vs. gifts vs. investments
Expenses
Program vs. fundraising vs. administration
Profitability
Business segments
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Analytic Tools - Profitability
Comparative
To prior year
To budget
To industry
Techniques
Absolute dollars
Trends
Ratios
Analytic Tools – Financial
Strength
Liquidity
Current ratio
Quick ratio
Debt usage
Short-term vs. long-term
Leverage
Debt vs. equity
Debt vs. total assets
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How do we match up?
Charity Navigator
GuideStar
Danger Signs
“Nonprofit syndrome”
Not understanding what makes money and
what doesn’t
Not controlling administrative expenses
Inadequate return on fundraising expense
Misuse of debt
Misuse of restricted funds
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Roles and Responsibilities
Board/Committees
Overall fiduciary responsibility for the
organization
Hiring top management
Approve budget
Monitor results
Hiring auditor
Monitoring internal controls
How Occupational Fraud Is Committed
Occupational Frauds by Category — Frequency3
10/5/2016 ©2016 Association of Certified Fraud Examiners,
Inc.
3The sum of percentages in this chart exceeds 100% because several cases involved schemes from more than one category.
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How Occupational Fraud Is Committed
Occupational Frauds by Category — Median Loss
10/5/2016 ©2016 Association of Certified Fraud Examiners,
Inc.
How Occupational Fraud Is Committed
Primary Internal Control Weaknesses
10/5/2016 ©2016 Association of Certified Fraud Examiners,
Inc.
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Detection of Fraud Schemes
Initial Detection of Occupational Frauds
©2016 Association of Certified Fraud
Examiners, Inc.
Video: The Boards Role in Finance
http://www.youtube.com/watch?feature=playe
r_embedded&v=xW5I1_EQ5og
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Roles and Responsibilities
Management
Day-to-day operations
Fiscal management
Prepare budget
Systems and procedures
Report results
Implementing internal controls (& monitoring)
Roles and Responsibilities
Auditor
Report to the Board
Examine financial statements for compliance
with GAAP – “Auditor’s Opinion”
Report weaknesses in procedures and
controls to the Board
Differences between audit report and internal
financials
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Budgets
Cash Flow vs. P&L budget
Depreciation
Restricted giving impact
Modifying (working budget)
Zero-based budgeting vs. surplus
Conservatism
The Budget Process
Who should be involved?
Board of Directors, Finance Committee
Executive Director
Program Directors
Accountant
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Tips for Board Members
Ask Questions!!
You have a fiduciary responsibility to understand your
financial statements – not just the FC
Request cash projections – how much cash do you
need for your operations?
If AR is significant - understand collection issues (aging)
Be aware of internal controls and how you may be a
part of it (whistleblower policy)
Know what relationships are typical for your type of
organization – trends/ratios
Understand what financial statement items require
management estimates.
Tips for Management
Provide a narrative summary of financial
results (dashboard)
Provide financial information at least 7 days
before the meeting
Provide comparisons to budget and/or prior
year results
Graphs are great!
Request training from external auditors
Repetition is ok
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What’s New?
Presentation of net assets
Change from 3 current classes (UR, TR, PR) to 2 classes (with donor restrictions &
without donor restrictions)
New disclosure on amounts & purpose of board designations
Policy needs to be adopted by organizations
Liquidity
New disclosure on quantitative & qualitative management of liquidity (i.e. how
resources are managed/reserve policies & clearly showing on face of financial
statements or in footnotes what sources are available for current operations)
Financial performance/operating measures
Defines 2 dimensions for evaluating & presenting
Reporting of expenses
Report by nature and function in 1 place in the financial statements (i.e. statement of
activities or in footnotes)
New required disclosure on methods used to allocate costs between program &
supporting activities
**Effective for fiscal years beginning after December 31, 2017
What’s New?
Leases
• Effective date for nonpublic entities = fiscal years beginning after December 15,
2019
• Leases recognized as assets and liabilities in statement of financial position
Revenue Recognition
• Five step process
• Addresses inconsistencies in reporting revenue and improves comparability
• Enhanced, more meaningful financial statement disclosures
Overtime Rules - The final rule focuses primarily on updating the salary and
compensation levels needed for Executive, Administrative and Professional workers to
be exempt
IRS Exempt Organizations 2016 Workplan – Exemption, protection of assets,
employment tax and UBIT
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Enterprise Risk Management (ERM)
Committee of Sponsoring Organizations (COSO) of the National Commission on Fraudulent Financial Reporting of the Treadway Commission published Enterprise Risk Management – Integrated Framework, which defined ERM as…….
Initial identification of organizational risks
Board level risks
Operational/management level risks
Design of framework/process
Metrics Board tolerances
Reporting
Monitor ongoing utilization
of ERM framework/process
“ a process, effected by an entity’s board of directors, management, and other personnel, applied in a strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives.”
Enterprise Risk Management (ERM)
11 Questions Governance Should Ask to Assess Risk Management Practices:
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Enterprise Risk Management (ERM)
11 Questions Governance Should Ask to Assess Risk Management Practices (continued):
Today’s Goals
Understand the financial statements used by NPO’s
Reporting requirements / options – audit v. review v.
compilation
What options do organizations have? These are
YOUR financial statements!
Understand what they tell us (and don’t) – focus
areas
Budgeting pitfalls
What’s new?
Tips for management & board members