Presentation on finance fundamentals for nonprofit organizations. Geared towards non-accountants, this presentation deals with the following: - Characteristics of nonprofits and responsibility for financial information - Basic review of accounting principles - Financial statements - Different members of the finance team - Financial policies for nonprofits - Communicating financial results - Nonprofit tax

1. FINANCE FUNDAMENTALS
February 29, 2012
Richard Wolf, CPA

2. Objectives
 Characteristics of nonprofits and responsibility for
financial information
 Basic review of accounting principles
 Financial statements
 Different members of the finance team
 Financial policies for nonprofits
 Communicating financial results
 Nonprofit tax

3. Characteristics of Nonprofits
Vary in their missions but share three characteristics
that are present in varying degrees and distinguish
them from investor-owned entities:
 Receive contributions of resources
 Provide goods and services, or both, for reasons other
than to make a profit
 No ownership interests

4. Responsibility for Financial Information
 Management is responsible for the content of the
organization’s financial information including
adopting sound accounting principles
 Management should establish and maintain controls
over the authorization, recording, processing, and
reporting of transactions
 Board of directors is responsible for management
oversight
 COSO framework

5. Basic Review of Accounting Principles
Definition of Accounting
Accounting is an information and measurement system
that identifies, records, and communicates relevant,
reliable, and comparable information about an
organization’s business activities.
(John Wild, Ken Shaw, Barbara Chiappetta. Fundamental Accounting Principles, 19th Edition. 2009.)

6. Generally Accepted Accounting
Principles (GAAP)
 Financial accounting practice is governed by concepts
and rules known as generally accepted accounting
principles (GAAP)
 Accounting standards for nonprofits are set by the
Financial Accounting Standards Board (FASB)
 Basis of accounting:
 Accrual (GAAP)
 Cash basis
 Modified cash basis

7. Accrual Basis
 Under the accrual basis, revenue is required to be
recorded when earned and expenses are recorded
when incurred
 “Earned” revenue includes receipt of a contribution
or a promise to receive contributions
 Accounts receivable
 Accounts payable and accrued expenses

8. Cash Basis
 Under the cash basis, revenue is required to be
recorded when received and expenses are
recorded when paid
 No accounts receivable
 No accounts payable and accrued expenses

9. Modified Cash Basis
 Modified cash basis is essentially the cash basis which
incorporates “modifications….having substantial
support”
 A modification has substantial support if both the
following conditions are met:
 It is equivalent to the accrual basis of accounting
 It is not illogical

10. Basic Financial Statements
 Three or four basic financial statements depending
on the type of organization
 Statement of Financial Position (Balance Sheet)
 Statement of Activities
 Statement of Cash Flows
 Statement of Functional Expenses (only required for voluntary
health and welfare organizations although many other organizations utilize this
statement)

11. Statement of Financial Position
 Might also be referred to as a “balance sheet”
 Reports the organization’s assets, liabilities, and net
assets at a point in time
 Focuses on the organization as a whole
 Assets = Liabilities + Net Assets
 Three classes of net assets
 Unrestricted
 Temporarily restricted
 Permanently restricted

12. Temporarily Restricted Net Assets
 Use is limited by either donor-imposed
 Time restrictions, or
 Purpose restrictions
 As the donor-imposed restrictions expire or are
removed by actions of the organization, temporarily
restricted net assets are reclassified to unrestricted

13. Permanently Restricted Net Assets
 Must be maintained by the organization in
perpetuity
 Does not expire with the passage of time and
cannot be removed or fulfilled by organization
actions
 Can only be changed by the donor

14. Unrestricted Net Assets
 Net assets that are neither temporarily restricted
nor permanently restricted
 All net assets whose use has not been restricted by
donors
 Board designations, which are voluntary board-
approved segregations of net assets for specific
purposes, projects, or investments, are also part of
unrestricted net assets

15. Statement of Activities
 Reports the results of operations (revenues and
expenses) and change in net assets over a period
of time
 The change in net assets must be presented in total
and also by net asset class

16. Statement of Cash Flows
 Provides information about the cash receipts and
disbursements of the organization over a period of
time
 Cash receipts and disbursements from operating
activities, financing activities, and investing activities
 Statement is a bridge from accrual basis to the flow
of cash
 Two main types:
 Direct method
 Indirect method

17. Statement of Functional Expenses
 Provides information about the organization’s
expenses by function and natural classification
 An organization’s functions are broken out by
program services and supporting services
 Supporting services include:
 Management and general
 Fund-raising
 Examples of natural classification are salaries,
occupancy, depreciation, and repairs and
maintenance

18. Footnotes To The Financial Statements
 Footnotes are an integral part of the financial statements
 Examples of footnotes include:
 Description of organization
 Summary of accounting policies
 Tax exempt status
 Detail of investments
 Property and equipment
 Leases
 Debt (loan details including future maturities)
 Concentrations

19. Assets
 Tangible, intangible, or future benefits to the nonprofit
 Many nonprofits classify their assets and liabilities as
current and noncurrent
 These designations refer to how quickly they are
expected to be converted into cash
 Current assets are expected to be converted within one
year
 Other nonprofits list their assets in order of liquidity

20. Assets - Examples
 Cash – includes highly liquid investments with original maturities
of three months or less
 Accounts Receivable
 Unconditional Promises to Give – discounted to their net
present value
 Inventories
 Investments
 Property and Equipment

21. Liabilities
 Reflect organization’s obligations to provide assets,
products, or services to others
 Accounts payable and accrued expenses
 Notes payable and other long-term debt
 Deferred revenue – cash received in advance of
providing goods or services

22. Contributions
 May take the form of cash, investments, goods,
services, right to use space, etc.
 They can be received at the date of donation or
may be in the form of a pledge for a future
contribution
 Recorded at fair value at the date of donation
 In-kind contribution – gift of goods to the nonprofit

23. Contributed Services
 Should be recognized as contributions if they create
or enhance a nonfinancial asset (such as property or
equipment), or
 They meet all of the following criteria:
 The service requires specialized skills
 The service is provided by individuals who possess those
skills
 The service would typically need to be purchased if not
contributed

24. Financial Statement Options
Audit
 Highest level of service provided by CPA
 Provides reasonable assurance that the financial
statements are free of material misstatement
 Auditor seeks to understand the nature of an organization,
reviews and evaluates internal control procedures, tests
underlying accounting records
 May identify weaknesses in internal control system
 Does not provide guarantees that no fraud exists

25. Financial Statement Options, cont.
 Review
 Less assurance than an audit
 Typically a lower fee due to less work required
 Provides limited assurance that there are no material
modifications that should be made to the financial
statements
 Compilation
 Does not express an opinion or provide any assurance about
the fairness of a set of financial statements

26. Finance Team
 Treasurer – Typically the officer of the organization
assigned the primary responsibility of overseeing
the management and reporting of an organization’s
finances. May or may not be a paid employee.
 CFO
 Controller
 Bookkeeper

27. Finance Team
 Finance Committee – supports development of
annual budget; monitors spending; provides
commentary on the “financial health” of the
organization to the board
 Audit Committee – monitors the effectiveness of
internal controls; reviews scope of audit;
recommends the selection, retention, or termination
of auditors to the board; reviews Form 990

28. Financial Policies
 Investment Policy
 Internal Control Procedures
 Purchasing Practices
 Unrestricted Current Net Assets (Reserves)

29. Investment Policy
 Helps defines the organization’s investment goals
and the financial risks the organization is willing to
take to achieve those goals
 Investment policies should include:
 Goals of the investment program
 Investment objectives, risks and return (target rates)
 Investment guidelines and constraints
 Allocation of assets
 Monitoring and control procedures

30. Internal Control Procedures
 Internal control is the plan of an organization and
all of the coordinate methods adopted within a
business to:
 Safeguard its assets;
 Check the accuracy and reliability of its accounting
data;
 Promote operational efficiency; and,
 Encourage adherence to prescribed managerial
policies.

31. Internal Control Procedures, cont.
 Not designed to uncover dishonesty and fraud
 Internal control system is designed to detect and
correct errors (mostly honest mistakes)
 Internal Control Structure has five components:
 Control environment
 Risk assessment process
 Information controls
 Communication controls
 Monitoring controls
 Control Activities

32. Segregation of Duties
 Individuals should not be put in situations in which they
could both perpetrate and cover up fraudulent
activity by manipulating the accounting records
 The functions of authorizing a transaction, recording
the transaction, and taking physical custody of assets
related to a transaction should be kept separate
 For example, the AP department can authorize
payment only after a purchase order is obtained
from another department

33. Purchasing Practices
 Serves as a tool for maximizing available resources of
funds, personnel, and time
 Procedures should be inclusive of different types of
purchasing, not just major purchases
 Consideration must be given to:
 Routine purchases of supplies
 Major equipment/furniture
 Service contracts
 Leasing of space
 Reimbursement of expenses
 Travel
 Services (insurance, legal, accounting)
 Others

34. Unrestricted Current Net Assets
 Formerly known as reserves or reserve funds
 What are optimal fund levels for the organization?
 Provides a cushion for the organization in times of
need
 Nonprofit strives to have unrestricted current net
assets available for a set amount of time (i.e., 120
days)
 Having large amounts of unrestricted current net
assets on hand is also considered to be a poor
management practice

35. Communicating Financial Results
 Who is the audience?
 Management
 Board of Directors
 Public
 Grantor
 What level of detail is required? How frequently
does it need to be communicated?
 Weekly cash report
 Monthly financials
 Annual financial statements

36. Communicating Financial Results, cont.
 Budget vs. Actual – How did the actual results
compare with the budget during the period?
 What are the key metrics that are important to your
audience?
 Number of members
 Museum visitors
 Contribution Dollars? # of contributors?
 Program Revenue and Expense

37. Nonprofit Tax
 Nonprofit is a type of organization, not-for-profit is a
type of activity, and tax-exempt is a status granted
by the IRS
 Different types of tax-exempt organizations:
 501(c)(3) – religious, educational, charitable, scientific,
literary
 501(c)(4) – social welfare organizations
 501(c)(6) – trade associations, business leagues
 501(c)(7) – social and recreational clubs

38. Unrelated Business Income Tax
 An organization is subject to tax on certain activities
to the extent the activities produce “unrelated
business income”
 Income is unrelated business income if the activity:
 Constitutes a trade or business;
 Is regularly carried on by the organization; and
 Is not substantially related to the performance of the
organization’s exempt function

39. Exceptions to UBIT
 Convenience exception – primarily for the convenience of
its members, employees, customers, etc.
 Volunteer exception – substantially all work is performed
without pay
 Sales of donated merchandise
 Qualified sponsorship payments – any payment received
by a person engaged in a trade or business to the extent
the person does not arrange for or expect to receive a
substantial return benefit

40. Advertising Income
 Almost always UBIT
 Special rules to calculate – direct and indirect costs
 May need to allocate a portion of dues to
circulation income

41. Form 990 Basics
 Form 990 – “Information Return”
 Due date of the return – 15th day of the 5th month
following the end of the organization’s taxable year
 Extensions – Automatic 3-month extension and an
additional (not automatic) 3-month extension
 Form 990, 990-EZ (gross receipts < $200k and total
assets < $500k) and “e-Postcard” (990-N) (gross
receipts $50,000 or less)

42. Filing Form 990
 Consists of a core form with 11 parts and 16
schedules
 Not all of the schedules will be required for each
organization
 What is the organization’s “story”?

43. Form 990 Information Requested
 Financial data
 Governance policies – heavily scrutinized by the IRS
and watchdog agencies (part VI of Form 990)
 Compensation
 Relationships
 Transactions with insiders

44. QUESTIONS?

45. Instructor Contact Information
Richard L. Wolf, CPA, CGMA
richard@richardwolfconsulting.com
Twitter: @richardwolfcpa
richardwolfconsulting.com