Financial Statement Tune Up: Putting Your Best Foot Forward
By Dyan Reinhold, CPA
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:
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.
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.
In our experience, we have discovered a number of disclosures that are commonly overlooked by nonprofits. They include:
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:
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.