CPAs & ADVISORS experience direction // FINANCIAL STATEMENT - - PowerPoint PPT Presentation

experience direction //

CPAs & ADVISORS

FINANCIAL STATEMENT ANALYSIS

Presented by Rick Wittgren, CPA, Partner & Daniel Waninger, CPA, Senior Manager

OVERVIEW

First Session (1:45 to 3:00pm) – Financial Statement Basics

Types of Reports Statement of Financial Position

Net Asset Classification

Statement of Activities

Revenue Recognition Expense Reporting

Report Requirements compared to Grant Size

Break (15 minutes) Second Session (3:15 to 4:30pm) – Beyond the Basics

Trend data, ratios and other indicators Characteristics of financially healthy nonprofits

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TYPES OF REPORTS / FINANCIAL STATEMENTS

Internal Financial Statements Compiled Financial Statements Reviewed Financial Statements Audited Financial Statements

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Least Assurance

Level of Assurance

Greatest Assurance

FORM 990

An annual reporting return that certain tax-exempt organizations must file with the IRS. It provides information on the filing organization's mission, programs, and finances Who is required to file

Most tax-exempt organizations, with the exception of churches and state institutions All 501(c)(3) private foundations, regardless of income

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Source: guidestar.org

FORM 990 (CONT.)

Who is not required to file

Nonprofits that have not received tax-exempt status from the IRS Most faith-based organizations State institutions Subsidiary organizations covered under a group return filed by the parent

• rganization

Guidestar, Charity Navigator and other watchdog groups

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Source: guidestar.org

990 INSIGHTS

990 is a public document, available for viewing at www.guidestar.org Areas on which to focus

Part I, question 1 – mission statement Part III, question 4 – program service accomplishments Part VI, section A, question 5 – did the organization become aware during the year of a significant diversion of the organization’s assets? Part VI, section B – policies Part VII, section A – officers, directors, trustees, key employees and highest compensated employees

Officers – Executive Director – must disclose their salary Five highest compensated employees greater than $100,000

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BUDGETS

What is a budget?

Forecast of revenue and support and cost and expenses for a period of time Forward looking

Why do organization’s budget? How reliable is a budget? What level of assurance comes with a budget?

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STATEMENT OF FINANCIAL POSITION

Nonprofit balance sheet Reports asset, liabilities and net assets of organization at a point in time Net assets broken into three classes

Unrestricted Temporarily restricted Permanently restricted

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STATEMENT OF ACTIVITIES

Non profit income statement Reports results from operations for a period of time Typically broken into three columns by net asset classification

Unrestricted Temporarily restricted Permanently restricted

Measure of operations? “Above the line” vs “below the line”

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REVENUE RECOGNITION

Contribution vs. exchange transaction vs. agency transaction

Contribution – revenue recognized upon notification Exchange transaction – revenue earned as services are performed Agency transaction – revenue is not recognized AICPA Not-for-profit Audit and Accounting Guide Flowchart 5-1

Contributions - unconditional vs. conditional

Unconditional – revenue recognized upon notification Conditional – revenue recognized upon satisfaction of condition ASC 605-25-8 through ASC 605-25-15

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EXPENSE REPORTING

Functional classification – grouping expenses according to the purpose for which the cost occur

Program expenses Supporting services

Management and general Fundraising

Natural classification – grouping expenses according to the kinds of economic benefits received in incurring those expenses

Salaries Employee benefits Rent Supplies Utilities

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FUNCTIONAL EXPENSES - EXPENSE ALLOCATION

Allocation of expenses to the agency between program activities and supporting activities

Direct allocation – expenses specifically attributable/identifiable to a program

• r support activity

Program manager who spends all of their time on the program they manage

Indirect allocation – method for allocating expenses which are not specifically attributable to a program or support activity

Depreciation expense, Executive Director’s salary Common allocation methods Estimation of time spent on each functional category Percentage of total salary expense Square footage occupied

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Report Requirements compared to Grant Size

What grant reporting is typically required of recipients? How does the reporting align with the significance of the grant? What if a grant is significant to one recipient organization’s operations, but not to another recipient organization’s operations? Should the reporting requirements be scaled to fit the grant size or organization size? Oversight of reporting requirements

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QUESTIONS

?

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TREND ANALYSIS

Practice of accumulating information over a period of time to analyze trends over the respective period

Historical trending Prospective trending

Allows decisions makers and others the ability to “see the forest”

Can reveal trends that may be unforeseen when analyzing current period financial statements or even when analyzing current to prior year financial statements

Useful in strategic planning

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RATIOS AND OTHER FINANCIAL INDICATORS

Another tool to analyze financial information and financial health of an

• rganization

As with trending, can provide useful information on trends of the

• rganization and other insights

Can be a tool for comparison to similar agencies Can help financial statement users better understand the financial results / financial health of the agency

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COMMON STATEMENT OF FINANCIAL POSITION RATIOS

Current ratio Days cash on hand Debt ratio Days in accounts receivable ratio Days in accounts payable ratio Net asset ratio Expendable financial resources Net Investment in plant

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COMMON STATEMENT OF ACTIVITY RATIOS

Income reliance ratios Expense composition ratios Functional expense ratio Fundraising efficiency Return on investments Gifts percentage

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CHARACTERISTICS OF FINANCIALLY HEALTHY NONPROFITS

Healthy Statement of Financial Position Indicators

Sufficient liquid assets to fulfil temporarily and permanently restricted net assets Positive unrestricted net assets Ability to access debt, if necessary, for short-term needs Sufficient unrestricted reserves to weather unforeseen financial challenges

Operating reserve policy Ability to add to these reserves in good years

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CHARACTERISTICS OF FINANCIALLY HEALTHY NONPROFITS

Healthy Statement of Activity Indicators

Diverse mix of revenue and support sources, not overly reliant on certain funding sources Consistently positive “operating” income Ability to meet mission objectives while maintaining a balanced budget Ability to respond quickly to budget challenges Ability to control spending and adhere with approved budget

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CHARACTERISTICS OF FINANCIALLY HEALTHY NONPROFITS

Organizational Indicators of a Healthy Nonprofit

Proper tone at the top Appropriate governance policies Diverse board with backgrounds that can contribute positively to the

• rganization

Proper staff training consummate with the organization’s mission Appropriate internal controls

Clean management letters if applicable

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PROPOSED CHANGES TO THE NOT-FOR-PROFIT REPORTING MODEL

Financial Accounting Standards Board (FASB) and its Not-for-Profit Advisory Committee has proposed several changes to the reporting model Changes to Net Asset Classification

Replace Unrestricted, Temporarily Restricted and Permanently Restricted net asset classifications Convert to net assets with donor restrictions and net assets without donor restrictions Disclose purpose and amount of board designations (which are not donor restricted)

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PROPOSED CHANGES TO THE NOT-FOR-PROFIT REPORTING MODEL (CONT) Tentative decision to define an Operating Measure

Mission dimension – based on whether resources are from or directed at carrying out an organization’s purpose Availability dimension - based on whether resources are available for current period activities, reflecting both external limitations and internal actions of an

• rganization’s governing board

FASB also supports to present an intermediate measure based on all legally available mission-related revenues before reductions for amounts designated by the governing board for use in future periods, rather than only the net of those amounts.

That presentation also would include amounts of previously unavailable resources the governing board made available for use in the current period.

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PROPOSED CHANGES TO THE NOT-FOR-PROFIT REPORTING MODEL (CONT) Reporting Cash Flows

Requires direct method cash flow Other changes to the classification of various items on the statement of cash flows

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QUESTIONS

?

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THANK YOU

FOR MORE INFORMATION // For a complete list of our offices

and subsidiaries, visit bkd.com or contact: Rick Wittgren, CPA// Partner rwittgren@bkd.com // 317.383.5470 Dan Waninger, CPA// Senior Manager dwaninger@bkd.com // 317.383.4213