Nonprofit Financial Statements: Best Practices
By Mahoney
Nonprofit organizations produce financial reports for a number of reasons: internal financial reports for management and the board of directors; financial reports provide to grantors, whether with applications or reporting; the Form 990 filed with the IRS; and audited financial statements.
Oftentimes, minimal thought and time is allocated to this task as an organization is focusing its energy on programmatic work and not administrative duties. However, a little extra thought invested in this task could help the organization which could provide benefits to other facets of its operations.
This article provides some tips to help your nonprofit’s financial statements be more transparent or to “tell your story” from the perspective of audited financial statements in accordance with generally accepted accounting principles (GAAP).
GAAP is actually quite flexible when it comes to the presentation as it does not prescribe, nor prohibit, particular formats for nonprofit financial statements.
Nonprofit Financial Statement Best Practices
The first statement in a set of financial statements is the Statement of Financial Position. To be presented in accordance with GAAP, the Statement of Financial Position must include:
- Total assets
- Total liabilities
- Total net assets
- Total net assets without donor restrictions
- Total net assets with donor restrictions
The only other requirements under GAAP include grouping assets and liabilities into reasonably homogeneous groups and presenting assets and liabilities in order of liquidity. Reasonably homogenous means you cannot present one line entitled “assets.” It must separate between types of assets like cash, receivables, property and equipment, etc.
This is where an organization can be flexible in how it can present its assets, liabilities, and net assets to tell a better story. The nonprofit can get as detailed or descriptive as it wants.
For example, a nonprofit with $250,000 cash on hand may have a board of directors consisting of business leaders. These business leaders are from the for-profit world and may not fully understand the concept of restricted funds; meaning that they may think all of the $250,000 is unencumbered.
Instead of presenting a single line entitled “cash and cash equivalents” on the Statement of Financial Position, the nonprofit could present multiple lines like:
- Cash and cash equivalents $ 85,000
- Cash – operating reserve $ 50,000
- Cash – restricted for programs $120,000
By reading the above, the user obtains a better understanding of the nonprofit’s cash position and purpose than if all cash were presented on one line. This thought process can be applied to all asset, liability, and net asset balances.
The Statement of Activities is the statement that shows the performance of the nonprofit during the period being reported on. To be presented in accordance with GAAP, the Statement of Activities must include:
- Change in net assets
- Change in net assets without donor restrictions
- Change in net assets with donor restriction
As with the Statement of Financial Position, this statement allows for a lot of flexibility to tell one’s story. Instead of one line showing “Contributions” you could present multiple lines like “Contributions – individuals, Contributions – corporate, and Contributions – foundations.”
Another tip for the Statement of Activities is to present non-operating activities separate from operating activities. For example, a nonprofit conducting a capital campaign would present those contributions separate from its operating contributions so the user could see the impact of those additional, one-time contributions in the results.
A nonprofit’s goal should be to provide informative financial statements without being too complicated. The financial statements may not be able to convey everything behind the numbers but could eliminate some questions based on the level of detail in its presentation.
When you’re looking for additional nonprofit financial statements best practices, send us your questions. We are always happy to be of help to you in any way.
Additional Reading: The Basics of Non-Profit Financial Statements
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