Ashley Larmore, CPA - December, 2007

Since the adoption of Statement of Financial Accounting Standard No. 117 (SFAF 117) in 1993, many volunteer board members have struggled understanding the basic financial statements of not-for profit entities. The goal of the SFAS 117 is to provide accounting and reporting procedures for all not-profit-organizations (NPO). This enables users to be able to compare the financial statements of different NPOs who operate similar programs.

1.      SFAS provides for a basic set of standardized external statements, which will reflect the organization’s financial condition and performance.

2.      The basic information will help external users to assess:

a)      The services an organization provides and its ability to continue to provide those services.

b)      How managers discharge their stewardship responsibilities and other aspects of performance.

c)      What the organization’s periodic performance was.

Terminology:

1.      Net Assets: The entity’s residual interest in assets after deducting liabilities.

2.      Classes of Net Assets: Permanently restricted, temporarily restricted and unrestricted.

3.      Permanently Restricted Net Assets: net assets resulting from contributions and other inflows of assets whose use is limited by donor imposed stipulations that neither expire with time nor can be fulfilled or otherwise removed by actions of the agency. In other words, endowment assets or land/building/collections which may be used in perpetuity, but may not be sold.

4.      Temporarily Restricted Net Assets: net assets resulting from contributions and other inflows of assets whose use is limited by donor-imposed stipulations that either expire with time or can be fulfilled or otherwise removed by actions of the agency. In other words, particular activities, investment for a specified term, use in a specified future period, or acquisition of long-lived assets. These net assets are similar to liabilities.

5.      Unrestricted Net Assets: net assets that are neither permanently nor temporarily restricted by donor-imposed limits. These are the remaining net assets and may be designated by the Board for certain purposes.

6.      Reclassifications: changes between classes of net assets resulting from donor-imposed stipulations, their expiration with time, or their fulfillment and removal by actions of the organization.

7.      Complete Set of Financial Statements: Statement of financial position (Balance Sheet), statement of activities (Income Statement), statement of cash flows and notes to the financial statements. The statement of functional expenses is not required, but encouraged and should be supplemental information if presented. Voluntary Health and Welfare organizations shall report functional expenses in at least supplemental information.

Note: While the Statement of Financial Accounting Standards provides sample financial statements, it allows the preparer a lot of room for creativity.

1.      Comparative format is encouraged but not required.

2.      The degree of aggregation and order of presentation should be generally similar to those required or permitted for business enterprises.

3.      The columnar presentation method is preferred over the stacked method. However, single-column, multi-column, single-page, multi-page formats are all permitted.

The Financial Statements:

Statement of Financial Position

1.      The purpose of this statement is to present the organization’s ability to continue to provide services and its liquidity, financial flexibility, ability to meet obligations and needs for external financing.

2.      Only a few amounts are actually required by Statements of Financial Accounting Standards No. 117. Those amounts are:

a.       Total assets

b.      Total liabilities

c.       Total unrestricted net assets

d.      Total temporarily restricted net assets

e.       Total permanently restricted net assets

f.        Total net assets

Note: These may be the only amounts required by SFAS 117, but more detail needs to be included.

Statement of Activities

1.      This statements provides relevant information to help the user determine:

a.       The effects of transactions that change the amount and nature of the net assets over a specific period of time (generally one year).

b.      The relationship of those transactions to each other.

c.       How resources are use for programs.

d.      The level of service efforts and the agency’s ability to continue in existence.

e.       How the NPOs management has performed its stewardship function.

2.      The minimum display required by SFAF 117 includes the amount of change in net assets for the organization as a whole and for each of the three classes of net assets. Once again, this alone is not sufficient detail for properly analyzing a Statement of Activities. It does, however, show the great flexibility the preparer has been given.

3.      Functional expenses are required to be reported by major classes of service and support.

a.       Program services are the activities that result in goods and services being distributed to beneficiaries, customers, or members that fulfill the purpose or mission for which the NPO exists.

b.      Supporting activities are all activities of the NPO other than program services; they include management and general and fund-raising.

Statement of Cash Flows

1.      In the past, the Statement of Cash Flows was not mandatory for all NPOs. Under SFAF 117, it is required.

2.      Just as with the for-profit entities, the not-for-profit Statement of Cash Flows can be prepared using two methods: the direct method and the indirect method.

a.       The direct method starts with a detail of cash basis income and expenses which results in cash provided by operations. Cash flows from investing activities are then listed and the final section shows cash flows from financing activities.

b.      The indirect method starts with the change in net assets and then makes certain adjustments to reach cash provided by operations, such as:

(1)   income that is restricted in purpose.

(2)   non-cash expenses such as depreciation.

(3)   the change in accruals that affected income.

                              And just as with the direct method, cash flows from investing activities are then listed and the final section shows cash flows from financing activities.

Statement of Functional Expenses

1.      SFAS 117 has not required any changes from the old format for this statement. A disclosure can be done in a footnote, but that will not be practical unless the NPO has only one or two programs.

2.      Management must decide how much detail is proper, both in program/funding sources to be shown and in the number of expense items listed in the statement.

We hope you find this information useful.  Of course, we are available to answer any questions you may have regarding financial statement reporting requirements, or any other tax, audit or accounting queries.  Please feel free to give us a call with comments or feedback if you enjoy receiving this update.  Look for more updates from us in the future!

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