Four ways to improve nonprofit financial statements

There are a number of ways for nonprofits to improve the presentation of financial information for the public, the board, and current and potential donors. From our extensive work with nonprofit organizations, here are four that are generally the most effective.
1. Review peer organizations’ statements for best practices. A review of other organizations’ financial statements is a great place to start when updating your own. Spend some time examining their financial statements looking for best practices you can implement and incorporate. Additionally, the American Institute of Certified Public Accountants produces guides and tools to assist identifying best practices in financial statement presentation and disclosure.
2. Examine your formats. Though it may seem a minor detail, the format of your financial statements is critical to the ease with which they are read and used. While some organizations use a multicolumn statement of financial position (balance sheet), most prefer single column. This preference is largely to meet the needs of board members who commonly view a commercial company’s financials in this format.
Although this seems to be the best choice for most organizations, many of you may have had conversations with bankers and others who like to drill down into the liquidity position. In the case of the statement of activities (income statement), we have found that organizations overwhelmingly use a multicolumn format. Some organizations also use a “stack” approach where the changes in unrestricted, temporarily restricted and permanently restricted net asset classes are literally placed below each of the other categories. Though less common, this format might be worth considering in determining whether there are any compelling reasons for a change.
3. Include an operating/non-operating presentation.Yet another area of flexibility is in the use of an operating/non-operating presentation within your statement of activities. Many organizations already use this with good results, especially for organizations with endowments. However, that is not the only item you can present in the non-operating section. Bequests, capital campaign activities (both revenue and expenses), nonrecurring items such as gains or losses from asset sales or retirements, and a host of other items can be reflected in the non-operating section.
4. Rework your footnotes. On that note, examining your footnotes can be a simple way to update your financial statements and ensure readability and transparency. A number of areas within your footnotes may reveal opportunities for improvement:
• Language: Sometimes historical information may not be as important for the years the financial statement is being presented. Review your footnotes for terminology that refers to a time frame older than the past two years and reword or remove any information that is no longer relevant to the financials being presented.
• Sequencing and order. Compare the order and flow of your core financial statements to your footnotes and ensure that your footnotes follow a consistent and logical flow of sequence. Do the same for the order of your organizational policy note and adjust it accordingly.
• Duplication. Common areas where duplication of information occurs include fair value, investments, endowments and net assets disclosures. If there is duplication, determine where the information is best presented.
• Investments and net assets. A best practice in disclosures of investments and net assets is a “roll forward” approach. In the case of investments, a roll forward can clarify how much new money came into the organization, how much was investment return and how much was withdrawn for operations.
• Organizational description disclosure. Review your current disclosure to determine if it accurately reflects what your organization does. Compare the list you have disclosed to your organization’s current activities and update the organizational description disclosure to reflect the current locations of the operations, programmatic activity and major sources of revenue. It is also a best practice to review the 990 for any additional information that could be relevant to disclose.
• Revenue recognition policy. Revenue sources may grow and become more material to your organization, so periodically review your revenue recognition policy for accuracy and completeness. Review each significant revenue line item on the statement of activities and compare it to the corresponding revenue recognition policy disclosure to determine if the existing disclosure adequately describes current activity.
• Financial statement caption policies. Double check that the significant line items on your financial statements align with their corresponding policy disclosures and add missing disclosures.
• Related-party disclosures. These disclosures should be reviewed and updated to help clarify the interrelationships of the organization. Make sure you adequately describe the nature of related-party relationships. Be sure to include the balances due to/from (receivables and payables) in the disclosures.
Simple changes to the way you prepare and present your financial statements can make a big difference in financial transparency and thus the confidence your donors, funders and bankers have in your financial position.
This has been a general presentation. It is prudent to discuss specific financial statement issues with a qualified professional. •


Michelle Spriggs is a shareholder in the accounting and auditing Group and member of the nonprofit & education practice at CBIZ Tofias & Mayer Hoffman McCann.

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