Financial Statement Tune Up: Putting Your Best Foot Forward
By Dyan Reinhold, CPA
As spring approaches, many nonprofits will soon conduct annual evaluations of their financial statements for best practices, as well as make any revisions necessitated by developments in their operations or changes in accounting regulations and tax codes.
Whether you have the resources for an extensive evaluation that includes best practices or plan to focus strictly on new standards, reading relevant publications, attending seminars, meeting with your auditors, and obtaining copies of audited financial statements for organizations you respect will help you gain a clear picture of where your sector is heading in terms of financial reporting.
Changes Impacting Your Financial Statements
While there have been only moderate changes that will impact your financial statements this year, it is still critical for you to understand their impact and present statements that exhibit both thoroughness and clarity. Heres an overview of the key changes you should understand:
Transparency and clarity of fair value disclosures are paramount and your financial statements need to make sense to the reader. Auditors will look closely at standard required footnotes, as well as required disclosures related to any items your organization is re-measuring at fair value of investments. Among the steps you can take to enhance readability are:
- Clearly and separately disclosing significant movement or transfers of investments in and out of levels and why.
- Adding more description to the documentation of Level 3 investments as to how fair value was estimated.
- Breaking out investments and listing them on separate lines.
- Offering disclosures about any tools used and research gathered to determine recurring and nonrecurring fair value measurements for Levels 2 and 3.
You also should pay attention to new standards related to derivative disclosures, which require more extensive reporting than in the past. For this year make sure to show derivatives in table format. Also you would be wise to first review various samples of standard wording to ensure your report conforms to industry accepted best practices in this area.
Regarding investments, there are several things to address. Among the most critical are modifying standard footnotes for use of the net asset value (NAV) practical expedient; showing gross purchases and sales of Level 3 investments; sufficiently disaggregating investments to show the nature of risk by industry, geography or security; and disclosing methods of determining fair values for non-practical expedient fair value.
Uncertain Income Tax Positions
Organizations should examine the standards and their footnotes to be sure they are properly accounting for and disclosing significant uncertain income tax positions.
Pay close attention to endowment disclosures. It is vital that you completely understand what is in the schedule, and whether they should tie to investments or not, as these disclosures were often reported inconsistently in the past. We suggest implementing a best practice in this area by reviewing two or three financial statements of similar organizations to see how your peers presented their disclosures. The Massachusetts Attorney Generals office posts statements online, and organizations like NACUBO have pertinent information also available online.
Commonly Missed Disclosures
In our experience, we have discovered a number of disclosures that are commonly overlooked by nonprofits. They include:
Making Your Financial Statements Relevant
- Details related to letters of credit, such as maturity and cost
- Considerations related to the issues paper covering pledges, beneficial interests and split interest agreements. Discount rates are the most commonly overlooked issue
- The existence of union contracts covering major employee groups
- Long-term employment contracts with executives
- Information regarding major suppliers and outstanding arrangements
- Revenue recognition covering all major sources of support
- Non-qualified benefit plans (457) and the existence of employee only retirement plans
- Cash restricted in use by donors, funders or others
- Supplemental fair value disclosures not made or complete for financial instruments not carried at fair value (conduit debt issuers, those using derivatives or those with assets exceeding $100 million)
- Insufficient mention of non-recurring fair vale measures in footnotes
- Footnotes that do not sufficiently cover the NAV practical expedient
To be effective, financial statements, including footnotes, must be relevant, easy to understand, and up-to-date. You can ensure yours are to a great extent by taking these actions:
- Carefully review your financials to make certain they make sense compared to internal presentations
- Ensure that your policies follow a logical sequence relative to the balance sheet and income statement
- Incorporate within the footnotes the freshest information
- Include disclosures only for relevant items and eliminate any unnecessary redundancies
- Ensure you have a policy for each major financial statement caption
- Use tables rather than text whenever possible
Once you are satisfied with the content and composition of your statement, take a look at what others have done. Exploring how other organizations report on items can provide new ideas and insight related to changes and modifications to financials that might be beneficial to your organization. Your auditor sees many financial statements over the course of a year and can likely offer suggestions on the form and content of statements and footnotes that will enhance your report. Use your auditors as a resource.
Remaining current on new disclosure requirements and the most effective form and content of statements and notes will help your organization stay relevant and in synch with important trends. Remember: clarity and accuracy are key.
Dyan Reinhold is a principal in the Not-For-Profit & Education Practice at CBIZ Tofias. Contact her at 617-761-0553 or DReinhold@cbiztofias.com.