Presentation of Financial Statements
of Not-for-Profit Entities
Presented by Tony Smith, CPA Beth Allen, CPA GreerWalker LLP
Agenda
• Audit Committees
– The Who’s, Why’s, What’s, When’s, and How’s
• Board Governance’s Role in Internal Control in
Nonprofit Organizations
• Proposed Changes to Financial Accounting in
Not-for-Profits
The WHOs
• Who should have an audit committee?
– Any not-for-profit that has an outside audit performed should have an audit committee.
• Who should serve on an audit committee?
– Understand the rules of the state in which your not-for-profit resides AND states where the not-for-profit solicits charitable contributions.
– Independence is key! No business relationships, no family members, no former executives.
– Typically, audit and finance committees are separate. – At LEAST one financial expert is best practices. – Two to five total members. All must be “financially literate”.
The WHYs
• Why is an audit committee important?
– There is a question on the 990 asking if the organization has an audit committee.
– Improved controls over financial reporting.
• Why should all not-for-profits have an audit
committee?
– Perception is reality.
The WHATs
• What are the responsibilities of an audit
committee?
– Oversight of: • Financial reporting • Risk management • Audit function
The WHENs
• When should an audit committee meet?
– Audit committees should meet with external auditors and management at least 2-3 times per year.
– Prior to each audit – meeting should cover auditors’ plan and scope.
– After each audit – meeting should cover audit findings and audit committee should approve the audit. – Additional meetings should be scheduled as needed to
cover risk management or other internal issues.
The HOWs
• How should an audit committee be governed?
– An official audit committee charter should be adopted and updated annually.
– The charter should cover specific duties and responsibilities of the audit committee.
• How much time should an audit committee member
expect to spend on committee work?
– IT DEPENDS!!!!!!!
– Factors that affect the number of meetings and how long each meeting will include:
• Stage of development of entity • Magnitude of issues • Complexity of entity
Board Governance’s Role in Internal Controls
at Not-For-Profit Organizations
Board of Director Checklist
• Audited Financial Statements on a Timely Basis
• Regular Finance and/or Audit Committee
meetings
• Backup Internal Controls when no Outside
Accounting Function
– Review bank statements – Monitor contributions received
• Monitor the Tax Return Disclosures
Board of Director Checklist
• Who is Collecting Donations/Contributions
– Evaluate internal controls
• Disbursement Limits for Two Signatories
– Who are authorized signors?
– Could internal personnel make the disbursement without an outside Director signing off?
– What about disbursement just under the limits?
Board of Director Checklist
• Expense Reimbursement Policies
– Who reviews expense reports for management?
• Surprise Audits
– People don’t like them but they are effective!
• What to do when a Director is preparing the
books, writing checks, bank reconciliations?
Separation of Duties
Two Person Office
Business Manager ED or Owner/Manager
Record accounts receivable entries
Mail checks
Write checks
Record general ledger entries
Reconcile bank statements
Record credits/debits in accounting records
Approve payroll
Receive cash
Disburse petty cash
Authorize purchase orders
Authorize check requests
Authorize invoices for payment
Approve and sign checks
Sign employee contracts
Complete deposit slips
Perform interbank transfers
Distribute payroll
Reconcile petty cash
Approve employee timesheets
Process vendor invoices
Review bank reconciliations and contents of bank statements
Separation of Duties
Three Person Office
Bookkeeper Office Manager ED or Owner/Manager
Record accounts receivable entries
Reconcile petty cash
Write checks
Record general ledger entries
Reconcile bank statements
Record credits/debits in accounting records
Process vendor invoices
Receive cash
Mail checks
Approve invoices for payment
Distribute payroll
Authorize purchase orders
Authorize employee timesheets
Approve payroll
Disburse petty cash
Sign checks
Sign employee contracts
Complete deposit slips
Perform interbank transfers
Review bank reconciliations and content of bank statements
Board of Director Responsibilities
with One/Two/Three Person Office
• Have Bank Statement Sent to a Director (who
doesn’t sign checks)
• The Board should set the Tone at the Top
• Review of significant transactions
• Review of sample transactions
• Analytical Reviews
Proposed Changes to Financial
Accounting for Not-for-Profits
Who? And What?
• Generally receive significant contributed resources • Includes charities, foundations, private colleges
and universities, nongovernmental health care providers, cultural institutions, religious organizations, and trade associations, etc.
• FASB has issued an exposure draft of a Proposed
Accounting Standards Update, Presentation of Financial Statements of Not-for-Profit Entities
– Will improve usefulness of the information provided to stakeholders, reduce the complexity of reporting, or both
Financial Statement Areas
Affected
• All!!
– Statement of Financial Position – Statement of Activities – Statement of Functional Expense – Statement of Cash Flows – Footnote Disclosures
Statement of Financial Position
• The proposed rules would eliminate the
distinction between assets with temporary
restrictions and those with permanent
restrictions. New categories:
– Net assets with donor restrictions – Net assets without donor restrictions
Classifying Net Assets
Net Assets
Unrestricted
Temporarily
Restricted
Permanently
Restricted
Without
Donor
Restrictions
With Donor Restrictions
Endowments
Net Assets WithDonor Restrictions Permanent Endowment Net Assets Without Donor Restrictions Board-designated Endowment Fund
Classifying Net Assets
Enhanced disclosure in the notes to the financial
statements would provide additional information
about the restrictions imposed by donors, such as
the nature, amounts and effects of such
restrictions.
Still must track and report temporary and
permanent donor restrictions
Statement of Activities
• One Statement
• Two Statements
– Statement of operations
• Must present, at a minimum, the operating excess (deficit) of a not-for-profit entity after transfers
– Statement of changes in net assets
• Must provide the information necessary to derive the total change in net assets
Statement of Activities
• The proposed rules would require not-for-profits
to present:
– Subtotal of operating revenues, support, expenses, gains and losses that do not have donor-imposed restrictions (before internal transfers)
– Subtotal that shows the effects of internal transfers resulting from governing board designations, appropriations, and similar actions that place or remove self-imposed restrictions on the use of assets that make
Statement of Activities
Required Subtotals
• Change in Net Assets
• Change in Net Assets with Donor Restrictions • Change in Net Assets without Donor Restrictions • Operating Excess (Deficit) Before Transfers • Operating Excess (Deficit) After Transfers
Functional Expenses
Operating
Expenses
Function
(required)
Nature
(required)
Non-Operating
Nature
(required)
Function
(optional)
Cash Flows
• Requires direct method for reporting cash flows
• No longer required to present reconciliation to
indirect method
• Would require certain cash flows be categorized
differently than they currently are
Cash Flows Reclassifications
Item Current GAAP Proposed ASU Interest and dividends Operating activities Investing activities Interest expense on long-term debt Operating activities Financing activities Purchases of PP&E, proceeds from sales of PP&E Investing activities Operating activities Contributions restricted for PP&E purchases Financing activities Operating activities
Cash Flows
• Required subtotals– Cash collected from customers – Receipts from sales of PP&E – Receipts of contributions from donors
– Receipts of contributions by donor stipulation are restricted for the purposes of acquiring, constructing, or improving PP&E, other long-lived assets, or acquiring or maintaining collections – Cash paid to employees and other suppliers of goods or services – Income taxes paid
– Payments at the time of purchase or soon before or after purchase to acquire PP&E or other productive assets, including interest capitalized as part of the cost of those assets – Other operating cash payments, if any
Increased Disclosure
• Management of liquidity and quantitative
information about financial assets available to
meet near-term demands for cash.
• Amounts of operating expenses by nature and
function.
• Methods used to allocate costs among program
and support functions.
Transition
• Retrospective Application
• Initial Year
– Disclose nature of reclassifications – Effect on changes in Net Assets
• No proposed effective date
– Question as whether it should be the same for all NFPs – No information on early adoption
