Page 34 - C&A's Nonprofit Board Guide

UNDERSTANDING FINANCIAL REPORTING FOR A
BOARD MEMBER

A Board member should be familiar with the ► Restrictions on net assets are created by the
information that is presented in the financial donor. Temporarily restricted net assets can be
statements. restricted as to time and/or purpose and will be
considered “released from restriction” once
THE STATEMENT OF FINANCIAL POSITION the restriction(s) has been met. Permanently
HAS THREE CATEGORIES: restricted net assets generally are held in
perpetuity (Board may have some control
ost Board members are not
M expected to be nonprofit financial AN UNMODIFIED OPINION IS WHAT 1. ASSETS over this depending on the wording in the
donor’s gift) and typically the earnings from
experts, but they should have a basic AGENCIES ARE STRIVING FOR, Most common assets of an organization include the principal amount can be used for general
understanding of the information in the financial BUT WHAT IS AN UNMODIFIED OPINION? cash, investments, accounts receivable, prepaid operations or temporarily restricted for a
statements that is presented to them. Having a expenses, and fixed assets. The assets are specific purpose.
basic understanding will help them better govern ► The presented in order of liquidity (how fast the asset
a nonprofit and allow them to better understand an purpose can be converted into cash). Current assets are ► Net assets will increase or decrease based upon
organization’s financial position, cash flows, and of an audit those assets that are generally expected to be the results of its operations as reflected on its
results of operations. This is important, as it is the is to opine on the available for use within a one year cycle (such statement of activities.
role of the Board to ensure that the organization’s information presented as cash, receivables, and prepaid expenses) and
funds are used prudently, and that the organization in the financial statements. long-term assets are those that cannot be used in THE STATEMENT OF
is fiscally sound enough to fulfil its mission. Once the audit of the financial the near term (such as property and equipment and ACTIVITIES INCLUDES:
By having better fiscal insight, Board members statements is complete, the auditor will restricted cash). ► Support (contributions, grants, and net
are better able to read and interpret financial give an opinion as to whether the information fundraising income) and revenue (fees for
reporting and ask the necessary questions of the presented in the financial statements is in 2. LIABILITIES services and program service revenue).
organization’s internal fiscal staff as well as the accordance with accounting principles generally
external auditors. accepted in the United States of America, better Represent the current (generally due within one ► Net assets released from restrictions, which
known as “GAAP.” An unmodified opinion is a year from the statement of financial position represents the use of an organization’s
To have a basic understanding of the financial “clean” opinion in which the financial statements date, such as accounts payable, and current debt restricted net assets. The amount is reflected
statements, a Board member should be familiar are presented in accordance with GAAP and the obligations) and future (such as long-term debt and as an increase to net assets without restrictions
with the common components of financial information presented in the financial statements contingencies) obligations that the organization is and a decrease in net assets with restrictions
statements: is not materially misstated. expecting to meet through the use of its assets. under support and revenue. The concept of net
► Statement of financial position (balance sheet) In essence these are liens, or anticipated liens, assets released from restriction is that once
WHAT ARE GAAP-BASED against an organization’s assets. a purpose or time restriction is met, usually
► Statement of activities (profit and loss) FINANCIAL STATEMENTS? through the use of the funds, these resources
► Statement of functional expenses 3. NET ASSETS are no longer restricted and should be included
► Statement of cash flows ► To be in accordance with GAAP, typical not- in net assets without restrictions.
for-profit financial statements must include the The difference between total assets and total ► Expenses, subtotalled by program, general
► Footnotes statements and footnotes noted above. liabilities. It represents the portion of the assets and administration, and fundraising. These
that the organization owns (not allocated for a amounts will agree to the totals reported on the
The Independent Auditors’ Report is shown before ► The amounts presented on the financial liability). statement of functional expenses.
the financial statements. This report provides the statements are recorded on the accrual basis
period under audit, the responsibility of the auditor of accounting (revenue recorded when earned Net assets fall into two categories: without ► Some people think that a nonprofit cannot
and management for the audit of the financial and expenses are recorded when incurred), as restriction (also includes net assets that are make a profit. A nonprofit is a business, just
statements, and the auditors’ opinion. opposed to the cash basis (revenue recorded designated by the Board for specific uses) and like any other business, and it should strive to
when received and expenses recorded when with restriction (includes temporarily restricted create appropriate “profitability” and establish
paid). Many smaller organizations maintain and permanently restricted). adequate reserves to develop strong fiscal
their books throughout the year on the cash viability.
basis and convert to the accrual basis for their
annual audit.

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