Show me the Money: The Statement of Financial Position

Financial Statement Series

The statement of financial position required for nonprofits by FASB Statement 117 is similar to the balance sheet which we discussed in a previous article in this series. The statement of financial position addresses the restriction in net assets that the balance sheet does not. The balance equation is still the same:

Assets=Liabilities + Net Assets

This statement, like the balance sheet, lists assets in the order of liquidity, liabilities in the order that they are due, and the difference between the assets and the liabilities is the net assets.

Because nonprofits are funded by donors and other organizations such as grantors, donors may place restrictions on the contributions to the organization. Assets need not be reported on the basis of donor-imposed restriction unless they are designated for long-term purposes or received with donor-imposed restrictions that limit their use for long-term purposes. In those cases, there are guidelines for breaking out and reporting the assets designated for long-term use.

Net Asset Restrictions

Information about the nature and amounts of the restrictions on net assets may be reported by using a separate line for each type of restriction. Information on restrictions may also be included in the notes for the financial statements.

Permanently Restricted Net Assets

These are assets that the donor has instructed the organization to maintain in perpetuity.

Endowments are examples of permanently restricted net assets. Commonly, a donor contributes funds for an endowment with instructions that the principal may not be spent but the income generated by the endowment fund may be used by the organization.

Temporarily Restricted Net Assets

Temporarily restricted Net Assets either have a donor-imposed time or purpose restriction. Perhaps money is donated to a school for use within a specific school year. A building fund is another example of temporarily restricted funds.

Unrestricted Net Assets

These are net assets which have neither a permanent nor a temporary restriction placed on them. In the absence of donor restrictions, net assets are unrestricted.

Final Note

The statement of financial position offers unique insights into the special circumstances of a nonprofit organization. Looking at the statement balances, a reader might ask the following questions:

• Is there enough cash to pay the bills?
• Are investments diversified per organization policy?
• Are receivables being collected in a timely manner?
• Are vendors being paid in a timely manner?
• How long have liabilities been on the books?
• Are tax liabilities being met in a timely manner?
• Are the restricted funds protected?

A properly prepared statement of financial position is part of the complete package of financial statements for nonprofits.

Next time we’ll look at the statement of cash flows.

Laura Reifschlager

Trainer

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Show me the Money: Understanding the Balance Sheet

Financial Statement Series

Throughout this series, we’ve established that FASB Statement 117 sets the minimum reporting standards for nonprofit organizations. The balance sheet is not part of those requirements, but is still a useful statement. The nonprofit version is the statement of financial position which is a balance sheet with net assets reported by restriction. We will look at the specifics of the statement of financial position next time. Looking at the balance sheet first will be a good primer.

Smile for the Camera

A balance sheet is a snapshot of an organizations assets, liabilities, and net assets. Because the statement is looking at different accounts than the revenue statement or the statement of activities, a different format is required. The key principle is that the statement represents totals as of the date issued, not a range of time. A balance sheet for December 31 reports on the financial position that date.

In its simplest form, the balance sheet lists assets and liabilities and subtracts the two to calculate total net assets. The balance derives its name from a basic accounting equation:

Assets=Liabilities + Equity

The equation always balances.

The Layout

Like the other statements, the balance sheet will have a heading and a body. Some balance sheets are laid out in a side-by-side manner with assets on one side and liabilities and equity on the other. This makes it easy to see that both sides equal, or, yes, balance.

A vertical layout is another choice with assets listed first, then liabilities, then net assets or equity.

The Contents

Assets are the things you own or what is owed to you. Assets are listed in order of liquidity. Liquidity is how close the asset is to cash, with cash, of course, being the most liquid. Securities that can be converted to cash very quickly are more liquid than a building and slightly less liquid than cash. Current assets are those assets which can be converted to cash within one full reporting cycle, most likely one year.

Next down the list would be less liquid assets such as accounts receivables or inventory. Long term assets are property, plant, and equipment as well as goodwill and long-term investments.

Liabilities are listed next. Liabilities are what you owe. They are listed in the order in which they come due. Just as for assets, liabilities are short-term and long-term.

Finally, the equity is listed. In the for-profit world, shareholder equity is the term used. Since there are no shareholders in the not-for-profit world, we use the term net assets. The simplest calculation is assets less liabilities equal net assets. It has to work out that way. It is a balance sheet, after all. Refer to the basic equation above. You get the math.

The Final Note

The balance sheet reports the financial position of the whole organization at a point in time. Readers can see what the organization owns and what it owes. These amounts may be used in financial ratios for further analysis. No one financial statement tells the entire story. The balance sheet is just part of the package. Next time we’ll look at the statement of financial position and its importance to a nonprofit organization.

Click here to read the previous article in this series.

Laura Reifschlager

Trainer

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Show me the Money: An Overview of Financial Statements for Fund Accounting

A Financial Statements Series

Accounting systems capture accounting transactions. Financial statements are constructed from these transactions and depict the economic activity and financial position of the organization. Knowing how to read financial statements may help you determine the health of a non-profit. Is it well-funded? Is it properly managed? How is the organization spending its resources? How have the assets or liabilities changed over time? Several key statements provide clues to these answers.

In a for-profit organization, net income can be a measure of success. Non-profit organizations use any surplus revenue to achieve its goals rather than distribute the surplus as profit. Changes in net assets are referred to as surplus or deficit and are carried forward. Thus FASB (that’s the Financial Accounting Standards Board) requires a different set of statements for non-profits.

This is the first in a series of articles where I’ll unravel the mysteries of those reports in easy-to- understand terms.

To begin, let’s look at some of the most popular reports produced. Then, in subsequent articles, we will look at the most common ones in a little more detail.

FASB Statement 117 requires that a complete set of financial statements for a nonprofit organization include:

• A Statement of Financial Position
• A Statement of Activities
• A Statement of Functional Expenses for Voluntary and Welfare Organizations and encourages it for other not-for-profit organizations
• A Statement of Cash Flows
• Financial Statement Disclosures

A Statement of Financial Position is similar to a balance sheet in that it shows the ending balance of the assets, liabilities and net assets (also called net equity) at a specific point in time. Further, net assets must be classified based on the donor-imposed restrictions of permanently restricted, temporarily restricted, or unrestricted.

A Statement of Activities is similar to an Income Statement, also known as a Statement of Revenue and Expenses, in that it reports the changes in net assets over a period of time. The change in net assets is also reported based on the restriction categories of permanently, temporarily, or unrestricted.

A Statement of Functional Expenses is the Statement of Activities with expenses reported by functional classification such as programs and services, management and general expenses rather than the natural classification of salaries, office and supplies expenses, and maintenance, to mention a few examples.

A Statement of Cash Flows summaries the inflow and outflow of cash by an organization over a defined period of time. Because many organizations use accrual accounting, the recognition of revenue and expenses is often different from the actual timing of cash receipts and disbursements. The  cash flow statement is intended to address the actual flow of cash and validate the ending cash account balance reported.

And finally, A Statement of Financial Disclosure simply stated is a list of explanations and comments that explain certain aspects of an organization’s procedures. FASB Statement 116 as well as FASB Statement 117 require specific disclosures for nonprofit organizations.

There. I’ve now defined the basic statements. A good fund accounting software program should provide these statements both “out of the box” and with customizable features. Sage 100 Fund Accounting provides standard statements that can be run without any changes as well as the ability to customize each report for the needs of specific organizations.

Stay tuned for more details on the most frequently used financial reports.

Update: Follow the links below to view the next articles in this series.

Show me the Money: Understanding the Statement of Revenue and Expenses

Show me the Money: The Statement of Activities with Functional Expenses

Show me the Money: Understanding the Balance Sheet

Show me the Money: The Statement of Financial Position

Laura Reifschlager
Trainer

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