How to Read Nonprofit Financial Statements

A Practical Guide

Andrew S. Lang, Tammy Ricciardella, Lee Klumpp, William D. Eisig

• Publisher: Wiley
• Year: 2017
• Print ISBN: 9781118976692
• eBook ISBN: 9781118976708
• Edition: 3
• Topic: Business
• Subtopic: Nonprofit Organizations & Charities
• Index: Business

EXPERT GUIDANCE ON HOW TO READ, INTERPRET, AND USE NONPROFIT FINANCIAL STATEMENTS—UPDATED FOR THE NEW FASB STANDARD RELATED TO NONPROFIT FINANCIAL REPORTING (ASU 2016-14)

If you're an executive or volunteer leader at a nonprofit who is unfamiliar with the formats and language of financial statements, this book fills you in on how to read and correctly interpret those critical documents. If you're a seasoned pro who wants to brush up on your skills while familiarizing yourself with the latest FASB nonprofit reporting standards, this is the only guide you need.

The intent behind creating the ASU 2016-14 was to improve the clarity and usefulness of nonprofit financial statements, but making sense of those statements can still be tough going for the uninitiated. Accountants and non-accountants alike who use and prepare nonprofit financial statements need guidance on how to interpret and implement the new FASB standard. Written for both audiences, this book:

• Clearly defines accounting terminology and concepts, while offering numerous examples of financial statements reflecting both the old and new FASB standards
• Steers you, line-by-line, through financial reports, providing explanations of differences between the old and new standards
• Provides numerous illustrations that help you quickly feel at home with the format of nonprofit financial statements
• Offers exercises that help you gain insight into the concepts surrounding nonprofit financial statements and reinforce your command of those concepts

How to Read Nonprofit Financial Statements, Third Edition is an invaluable resource for everyone who reads, interprets, or prepares those all-important documents.

Chapter 1
Why You Need to Understand the Update to the Nonprofit Reporting Model

Anyone who is responsible in some way for the welfare of a nonprofit organization, whether as a leader, member, donor, manager, or staff, needs to be well aware of recent changes in rules affecting all nonprofit financial reporting. The Accounting Standards Update (ASU) 2016-14 will change the way nonprofits classify net assets and prepare their financial statements. While the changes do not substantially alter a nonprofit's financial statements, they are of sufficient significance that they must be understood by those with a fiduciary responsibility or simply an interest in the well-being of the entity.

This book has been prepared for any and all readers. It provides definitions of common accounting jargon and provides numerous examples of financial statements reflecting both the old standards and the new ones. We applaud you for investing your time to understand what is new in our nonprofit world.

Chapter 2
Why Update the Nonprofit Reporting Model?

The current reporting model for nonprofit organizations has been in existence for more than 20 years. Many stakeholders raised the question as to whether a refreshed model would be more useful to users of nonprofit financial statements. The Financial Accounting Standards Board (FASB) analyzed the situation based on input from the nonprofit industry and concluded that improvements were in order. They then added the project Financial Statements of Not-for-Profit Entities to its agenda, which ultimately led to the issuance of Accounting Standards Update (ASU) 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities.

The goals of ASU 2016-14 are to improve the overall understandability, comparability, and usefulness of nonprofit financial statements. The ASU is not an overhaul but an update of existing standards for nonprofit organizations. The update to the current presentation of the net asset classification requirements is one major component of the project. Another aspect of the project was to work to improve the information provided by nonprofits to allow readers to be able to assess the liquidity, financial performance, and cash flows of nonprofit organizations.

Thus, the ASU is aimed at revising current reporting practices so that they are clarified to allow for clearer reporting on how restrictions on a nonprofit's resources affect liquidity. The ASU requires enhanced disclosures about financial assets and the extent to which they are not available in the near term because of limits imposed by donors, laws, and internal governing board actions. These expanded disclosures should assist users of nonprofit financial statements in assessing an entity's liquidity.

ASU 2016-14 affects substantially all nonprofit entities as defined in the FASB Accounting Standards Codification (ASC). Based on the ASC, nonprofit entities are defined as “an entity that possesses the following characteristics, in varying degrees, that distinguish it from a business entity: (a) contributions of significant amounts of resources from resource providers who do not expect commensurate or proportionate pecuniary return, (b) operating purposes other than to provide goods or services at a profit, and (c) absence of ownership interests like those of business entities.” While the first or second characteristic may or may not apply to your organization, the third most certainly should cover the industry as a whole.

Chapter 3
Highlights of the Major Changes to the Nonprofit Reporting Model

Net Asset–Related Changes

Update to Net Asset Presentation

The ASU requires a change in the presentation of temporarily and permanently restricted net assets to a single classification of net assets with donor restrictions. This change is designed to reduce complexity and increase understandability of this information. The ASU also requires enhanced disclosures that show the detail of net assets with donor restrictions at the end of the reporting period as well as how the restrictions affect the use of the resources. This additional information must be presented in either the face of the statement of financial position or in the footnotes to the financial statements. The FASB believes that the expanded presentation about various types of restrictions would provide more information than the current aggregated summaries of the total temporarily and permanently restricted net assets presentation and disclosures currently provided to readers of the financial statements.

The previously categorized unrestricted net assets will now be referred to as net assets without donor restrictions. The terminology change is seen as a refinement since the use of the term unrestricted net assets implies that the assets are not subject to any restrictions. However this category of net assets is oftentimes subject to restrictions resulting from laws, regulations, and other terms and conditions of bond agreements and other contracts. This change in terminology will more clearly show that these net assets are not subject to any donor restrictions but can in fact be subject to restriction by these other arrangements or parties.

The presentation of net assets with donor restrictions will encompass both the categories previously titled temporarily and permanently restricted net assets with the goal of streamlining this presentation to show all assets with donor restrictions. This category includes funds received with restrictions from both donors and grantors. There has been a lot of confusion in the past surrounding the classification between temporarily and permanently restricted net assets, and this change aims to eliminate this confusion. The use of the term with donor restrictions is a heading, and an entity can maintain subcategories under this heading, as they feel necessary to clearly portray their net assets. The disclosures for net assets with donor restrictions should clearly state the nature, purpose, and amount of the donor restrictions so that a reader can fully understand the nature of the restrictions.

Disclosures of Board-Designated Net Assets

The ASU requires additional information to be disclosed either on the face of the statement of financial position or in the notes to the financial statements regarding the various types of board-designated net assets. These are net assets without donor restrictions that the nonprofit's board imposes limits on for specified purposes. This change will assist nonprofit entities in showing how they are managing their resources. The purpose of the board-designated net assets is now required to be disclosed in the footnotes. The FASB also believes this will help nonprofit entities clarify their financial condition and results.

Update to Presentation of Underwater Endowments

Under the ASU, the amount that a donor-restricted endowment fund is underwater will now be presented as part of net assets with donor restrictions. The term underwater endowments refers to the situation in which the fair value of the assets to be maintained in perpetuity measured at the financial statement date is less than the original gift or the level required to be maintained by the donor stipulation or law. The premise for the change in showing the underwater amounts as part of net assets with donor restrictions instead of as net assets without donor restrictions is due to changes in the enacted version of the Uniform Prudent Management of Institutional Funds Act (UPMIFA) that allows spending, within the guidelines of prudence, from an underwater endowment fund. The FASB believes that the presentation of the entire amount of an endowment fund as donor restricted, whether underwater or not, is consistent with current laws. FASB also believes that keeping the full endowment in one place reduces the complexity of this information and thereby makes the information on endowment funds easier to understand.

The disclosures related to underwater endowments will continue to include the aggregate amounts by which funds are underwater as in current accounting principles generally accepted in the United States of America (U.S. GAAP). The disclosures, however, will also include the aggregate of the original gift amounts for such funds, fair value, and any governing board policy or decision to reduce or not spend from these funds.

Expirations of Capital Restrictions

The ASU will require that nonprofits use the placed-in-service approach to recognize gifts of cash restricted for acquisition or construction of property, plant, and equipment in the absence of a specific donor stipulation to the contrary. This change will assist in reducing the diversity in practice currently seen in nonprofit financial statements. Before the ASU, a nonprofit could recognize a gift over the implied time restriction related to the gift and recognize revenue as they depreciated the asset if this was their policy. Upon adoption of ASU 2016-14, this option has been eliminated unless the donor specifically states a period of time that the contributed asset must be used. This is the only provision in the ASU that changes the accounting (recognition and measurement). All other provisions in the ASU are presentation changes only.

Expense Reporting–Related Changes

Nonprofits will be required to provide an analysis of expenses that shows expenses detailed by nature and by function. Nonprofits have the option to present this information in the statement of activities, a separate statement, or in the footnotes. If the entity chooses to present the analysis in a separate statement, it must be presented as part of the basic financial statements and cannot be presented as a supplemental schedule to the financial statements. The analysis component ...

Table of contents

• Cover
• Praise for How to Read Nonprofit Financial Statements
• Title Page
• Copyright
• Preface
• Learning Objectives
• Introduction
• Chapter 1: Why You Need to Understand the Update to the Nonprofit Reporting Model
• Chapter 2: Why Update the Nonprofit Reporting Model?
• Chapter 3: Highlights of the Major Changes to the Nonprofit Reporting Model
• Chapter 4: What Is the Purpose of Financial Statements?
• Chapter 5: Types of Financial Statements
• Chapter 6: How to Read a Nonprofit Financial Statement
• Chapter 7: Statement of Financial Position
• Chapter 8: Statement of Activities
• Chapter 9: Statement of Cash Flows
• Chapter 10: Statement of Functional Expenses
• Chapter 11: Footnotes to Financial Statements
• Chapter 12: Internal versus External (Audited) Financial Statements
• Chapter 13: The Independent Auditor's Report
• Chapter 14: Other Types of Auditor Opinions
• Chapter 15: Supplemental Information
• Chapter 16: Reserves
• Chapter 17: Financial Statement Exercises
• Chapter 18: Example Set 1
• Chapter 19: Example Set 2
• Chapter 20: Example Set 3
• Chapter 21: Financial Analysis
• Chapter 22: Benchmarking
• Chapter 23: Increasing Complexity in Nonprofit Financial Reporting
• Chapter 24: Nonprofits Subject to Government Auditing Standards and a Single Audit under the Uniform Guidance
• Glossary Prior to Effective Date of ASU 2016-14
• Glossary Amendments Made Upon Adoption of ASU 2016-14
• About the Authors
• Index
• End User License Agreement