Your not-for-profit’s financial statements are used for more than just meeting compliance standards. Financial statements provide your board and the general public with an inside look at the financial stability of your organization. From reporting revenue and expenses to a description of your organization’s purpose, your financial statements speak to how your organization fulfills its mission.
Because your financial statements may have wide visibility, we recommend you periodically review your reporting process and make necessary updates so that your financial statements are transparent and accurately reflect the nature of your organization. Below, we collected some of the best practices to consider when you next evaluate your financial statement preparation process.
Internal Financial Statements vs. External Audited Financial Statements
Not-for-profits should compare their internal financial reports with their external audit reports. Pay close attention to the measure of operations and the revenue and expense categories. There may be some differences between how these areas are reported internally versus externally. We recommend you explain any differences to your board so that they have the best available information to make decisions that impact the organization and understand why there are differences between the internal and external reports.
Organizations’ financial statements may contain immaterial amounts that are presented as a single line item. Sometimes small-dollar items are still relevant or important, such as when they involve related party transactions, and those should still be shown separately. But many times small-dollar items just clutter up the financial statements and take attention away from the important numbers. Take the time to ensure that your financial statement lines present the appropriate amount of detail and allow the reader to focus on important, material amounts. We recommend establishing guides, such as a 1 percent rule for combining small-dollar items, to help expedite the reporting process. This could be 1 percent of total revenues or total assets. Setting a threshold helps clean up financial statements and ensures that readers stay focused on important matters.
The footnote disclosures to your financial statements bring additional clarity to your reporting, so it’s important they are as organized and concise as possible. Comb through the footnotes to eliminate any duplication. You only have to say something once. Sometimes that information can be displayed in the financial statements or it may be better documented in the footnotes.
Pay close attention to the description of your organization. This footnote represents the “story” of what your organization does. Double check that you have accurately captured the scope of your mission, including the addition of any new programs started during the year. Take credit within your financial statements for all of the great things going on at your organization!
You should also examine your restricted net assets footnote. Net asset presentation is an area that has been targeted for change, but the new guidance on how to classify restrictions won’t take effect for several years. For now, follow the standard three-definition model, which classifies net assets as unrestricted, temporarily restricted or permanently restricted based on donor restrictions, and provide full explanations for how the restricted net assets will be utilized.
Some other questions to consider when reviewing your footnotes include:
- Do policies and notes follow a logical sequence?
- Did you fully describe sources of revenue and how they are recognized?
- Are related party transactions clear and evident?
Financial statement disclosures can be challenging. Particularly challenging are disclosures related to fair value, investments, and endowments. There are many opportunities for mistakes in these areas. Guidance from standard setters will soon be provided that will help financial statement preparers present more effectively disclosures around fair value, investments, and endowments.
The following represents a sampling of the common problems and omitted disclosures that auditors find with financial statement disclosures in addition to those noted above. Review the disclosures on this list to ensure your financial reporting is accurate.
- Union contract covering major groups of employees
- Long-term employment contracts with executives
- Concentration of donors or suppliers
- Disclosure of self-insurance
- Conditional promises to give
- Using discount rates that are not risk-adjusted
Other Risk Areas to Watch
It may be a minor detail, but mistakes in grammar and spelling can be glaring to financial statement readers. Look for the correct use of homophones (e.g., principle versus principal) as well as similar words that have different meanings (e.g., affect versus effect). In a financial report designed to accurately portray your organization, the last thing you want is for your organization to seem too careless to check for grammar.
The following resources provide additional guidance for how you can improve your financial statements:
- Webinar: Not-for-Profit Reporting Model and Best Practices in Financial Reporting
- Four Ways for Not-for-Profits to Improve Financial Statements
For more guidance and best practices for financial statement reporting, please contact your CBIZ Tofias and Mayer Hoffman McCann Not-For-Profit & Education advisor, or you may contact us here.
Brent Wilson is a Lead Managing Director and member of the Not-For-Profit Practice. He is located in the Kansas City office of CBIZ MHM. He can be reached at 913.234.1079 or firstname.lastname@example.org.