Webinar Transcript: Questions Every Nonprofit Leader Should Ask
Webinar Transcript
Jim Shellenberger
Good afternoon and thank you for joining us today for today’s webinar titled, Reading Between the Lines: Questions Every Nonprofit Leader Should Ask About Financial Reporting and Form 990.
I’m Jim Shellenberger, Partner and Director of Nonprofit Services here at McKonly & Asbury. Joining me for today’s webinar, I have two of my esteemed colleagues, Mark Welliver, who is an Assurance Director, and Alyssa Irish, a Nonprofit Tax Manager. If you’re not familiar with us, McKonly & Asbury is an independent accounting and business advisory firm with offices in Camp Hill, Lancaster, Bloomsburg, and Philadelphia, Pennsylvania.
We offer a wide range of services to organizations in various industries, and I encourage you, and for all of those 101 individuals who are joining us today, to please visit our website to learn more about our services and industries served. If you’ve joined us on past webinars, welcome back. We’re glad that you’re here. If you haven’t, our monthly webinars feature various business topics to keep you updated on what’s going on around in the business world around us.
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Our thought leadership subscription, called M&A Insights, gives our subscribers the opportunity to select which topics are most relevant to them. Subscribe today to stay informed. So before we get into today’s presentation, if you have any questions for us, myself, Alyssa or Mark, please submit them to us through the built-in questions function in the webinar control panel, and we will do our absolute best to answer them either during the webinar or afterwards.
For those of you who are looking to obtain CPE today, and I know there’s a lot of you out there looking for CPE, please keep in mind that there will be four, and I repeat, there will be four polling questions throughout today’s presentation, and you must answer all of these questions in order to get your certificate via email, which will be sent out one month within one month after the webinar.
In order for attendees to be eligible, you must answer all the polling submissions and we will not accept late responses.
Okay, so we are going to go ahead and get started. And as Mark, Alyssa, and I sat down to think about this presentation, we wanted to ask ourselves a couple of questions about, the Nonprofit industry and what makes it unique. And, Mark naturally talked a lot about financial statements, and Alyssa talked a lot about the IRS form 990, because that’s where they live, and that’s where they spend a lot of their time.
So we thought we’d start with a little bit of a basic understanding about what makes Nonprofit Financial Statements unique. I get this question all the time. In fact, this morning I was speaking at an audit committee meeting. And the idea of Nonprofit Financial Statements and what makes them differ from Private Statements and Public Statements, came up. So it’s a relevant topic.
And I think there’s nobody better, in my opinion, to talk about this than my colleague Mark Welliver. So, Mark, why don’t you go ahead and take it away and tell us what makes Nonprofit Financial Statements unique?
Mark Welliver
Awesome. I appreciate that lead in there. It’s a high standard, set there. But no, when we’re discussing this question, I think it’s actually a really difficult question for me to answer because my first response was, it depends.
So as Jim kind of alluded to, I think it really depends on who pose that question to. Internally, we ask our coworkers, hey, what’s unique about Nonprofit Financial Statements? What are some of the challenges? They’re going to immediately point to, net assets with and without donor restrictions and rules around that, specific revenue recognition rules, and maybe even the functional expenses.
Now, if you step back from that perspective, let’s say, a community volunteer, that’s sitting on the board of a local nonprofit organization, has no financial background, you ask them that same question, they’re probably going to say these financial statements are just in general, completely overwhelming. It’s a lot of data compiled in very few, pages, in a document.
So, from that lens, I think that’s a fair assessment. If you look at the Financial Statements, there’s a lot of numbers being thrown around, a lot of line items. So if you don’t have a background in that, it definitely can be a little bit intimidating. So, I think over these next couple of slides, hopefully we’ll simplify that.
And make your next encounter with Nonprofit Financial Statements a little bit less intimidating.
So for time sake, we’re just going to focus on these four statements that we’ll typically see in a set of Nonprofit Financial Statements. And really, the overall objective is to summarize each statement into which question or what kind of questions that information can answer for us. So for starters, we’ll start on the Statement of Financial Position.
Or what is better known as The Balance Sheet. This is basically going to provide us a financial snapshot at a point in time. And with that in mind, that’s going to answer that question of where are we, where do we stand today? It’s going to answer that question, by showing what we have, what we owe, and then what’s left over.
So let’s dive into a little bit of those details. So what we have, those are going to be our assets, right? Think cash. How much cash on hand do we have at a specific point in time? Typically it’s going to be a month-end, year-end, quarter-end, whenever you’re reviewing these financial statements. What we owe.
That’s going to be your liabilities. So think accounts payable, accrued expenses, maybe debt. When we compare what we have versus what we owe, that’s what’s left over. And that’s what we refer to as net assets or those resources that are available for the future. And it’s within that net asset figure.
That’s where we first encounter some of the unique reporting aspects of Nonprofit Financial reporting.
So that concept being net assets with and without donor restrictions, there’s always a hang up. I think the easiest way for me to explain this concept is, of those resources that are available, which resources can you use without getting the permission from somebody else, without asking somebody else? How do I use it? Where do I use it?
When can I use it? If you have cash or investments, and there’s a specific purpose that you need to spend it on, or a specific time period that you need to spend it in, and that’s mandated by an external party, you’re most likely looking at assets with donor restrictions. So you want to track that activity separately.
So when we’re looking at that statement of financial position and then those net assets, we’re looking at those net assets with donor restrictions, because it just provides an area of just additional consideration, for the readers and the and the end users of the financial statements.
As we move on to the next statement, we have highlighted the Statement of Activities. So this kind of answers the question of where are we today? So if you look back, Statement of Financial Position is going to tell us where are we today. Your Statement of Activities are going to tell us how we got here. That’s going to tell us how we got here.
By showing us where the money came from, whether that’s contributions, maybe programs service revenue, grants, fees, membership dues, etc. It’s also going to show where the money went via the expenditures. And then we’re ultimately just going to reconcile it down to that ending, that asset balance that we actually reported back on the Statement of Financial Position.
Now, when we reconcile to that asset balance, it can also show whether the organization ended that period, in a stronger position or a weaker position. And that’s via that measure of operations that, we, we call the Change Net Assets, or for the For Profit people, the net income or loss.
I think anytime someone gets a Statement of Activities or the P&L or the Profit and Loss statement, income statement, whatever you want to call it, they immediately go to that figure. Hey, how did we do? So with that in mind, I think we can also refer to the Statement of Activities as really the financial report card.
For any given period of time. So let’s say, hey, do we generate a surplus for this period? Yeah. Great. Did we already budget for a surplus, and are we actually checking behind budget? Maybe. So rather than an ‘A” in that situation, maybe you can give yourself like a “B” minus “B” plus. Depends on the grader.
I’m a tough grader. So I feel like I’d give that one a “B” in that situation.
Jim Shellenberger
Mark, I was warned many years ago not to put grades on to financial statements.
Mark Welliver
So put grades out of line.
Jim Shellenberger
Yeah. I think you have to be careful there. But I get asked a question a lot, Mark.
Yeah. Particularly with that last part, stronger or weaker and the changes of net assets. Is it okay for a Nonprofit organization to have had that surplus? Is it okay?
Mark Welliver
Yeah, I would say definitely. Yeah. A lot of times, I think Nonprofits are really kind of hoping for a break even or slightly below break even.
I think that they view that as a good year. And basically what that says is, you brought in enough resources to run your mission, essentially.
Jim Shellenberger
I always say too that Statement of Activities is covering a period of time, right? It’s covering typically one year. It could be it could be a different period of time.
And it’s okay that for that period of time, you’re in a surplus because your organization may have plans in the future to utilize that surplus for certain needs and certain plans and activities, right? And just because you are an, air quote, Nonprofit Organization, doesn’t mean you can’t operate like a business and have a surplus.
Mark Welliver
Yeah, absolutely.
I think the best run organizations usually have a combination of mission driven and profit driven.
Jim Shellenberger
Yeah. And I’m sure, Alyssa, will talk about a little bit later what happens when you do get out of the your mission area and you create income that’s not related to your mission, but we’ll get there.
Mark Welliver
I don’t know what you’re talking about there.
Jim Shellenberger
Yeah. Yeah.
Mark Welliver
So I think as we move along here, this next statement, the Statement of Functional Expenses. This is actually an optional statement. And this is again something very unique to Nonprofits in the industry. I say it’s optional because there’s three different ways to share this information. One is compiling the information in a footnote that accompanies the overall financial statements.
Another way is to embed it within your actual Statement of Activities. And then the last one is, reporting it as a standalone statement, Statement of Functional Expenses. I’ve only seen, I’m just kind of talking generalities, the footnote disclosure route on, really small organizations, that have very limited expenses or limited program activities or it just doesn’t make sense to show that and prepare a separate Statement of functional Expenses, and on a very real occasion, I’ve seen statements that have the functional expense allocation embedded within that Statement of Activity.
So I think the majority of financial statements, either internally or externally that I’ve seen, have this information reported separately, and on a separate Statement of Partial Expenses. Is that a fair statement, Jim?
Jim Shellenberger
Maybe it’s just me showing my age a little bit, Mark. But, definitely been around a while, and I see them presented multiple different ways.
You know, back when the standard was introduced back in 2016 that required this to be presented, it was previously only required for voluntary health and welfare organizations. And that definition was often very, very loose, if you will. So now all Nonprofit organizations have to report their expenses both by a functional and natural classification. The majority do present a Statement of Functional Expenses.
I think, in my opinion, that’s the easiest. Much like you said. But, honestly, just an hour ago, I was looking at a Statement of Activities, actually with Alyssa, where the organization uses the Statement of Activities to report that way.
Mark Welliver
Yeah. I mean, I think it’s ultimately just up to the organization and how they choose to present that.
I think when you put it within the Statement of Activities, it could get a little bit cumbersome and overwhelming to an initial user of those financial statements. So I think, the separate Statement of Functional Expenses is actually just a cleaner and easier kind of way to present this information.
Jim Shellenberger
I would agree with that, and I think it helps, in my opinion, better articulate what is trying to be reported.
Right. Like, you talk about a little bit with the Natural classification in the Functional.
Mark Welliver
Yeah. Excellent. So just continuing on the Statement of Functional Expenses here. Honestly, like when I’m looking at a set of financial statements, I kind of view it as more of a supplement to the statement of Activities rather than its own kind of standalone reporting.
I say it’s more of a supplement, because if we look back and remember back to that previous slide, the Statement of Activities that are going to show the money coming in via the different revenue sources, contributions, program service fees, etc., but it might show where that money was spent in a very summarized fashion.
So that’s why I say this Statement of Functional Expenses can be a supplement too. Because within that Statement of Functional Expenses, Jim alluded to it, expenses get reported by their Natural Classification. So let’s think salaries and wages, your occupancy costs, office supplies. And then this, statement actually takes this a step further and then classifies those expenses among these three Functional categories for program services, management and general, and fundraising.
So program services, think of those costs that are strictly related to running the programs that are in line with your mission, your management and general costs, really just the general administration and operation of the organization, and then your fundraising expenses or activities are kind of self-explanatory. It’s those cost that incurred while you’re soliciting contributions or running certain fundraising activities.
So as a whole, the Statement of Functional Expenses is going to tell the reader what was purchased through the National classification and then why it was spent, via the Functional Classification.
Jim Shellenberger
And sneak peek for a couple of slides in advance, this is really important too on the IRS 990. And, Alyssa is going to talk about that when we get there.
Mark Welliver
And then the fourth and final statement that we’ll just kind of touch on and hopefully kind of summarize and simplify is Statement of Cash Flows. This basically just shows you where the cash is going out and coming in. It’s really just going to reconcile your beginning cash balance, down to your ending cash balance that’s sitting on that Statement of Financial Position.
At any point in time. And it’s going to reconcile that via three different categories your Operating activities, your Investing activities, and your Financing activities. So in a way, the Statement of Cash Flows is really the organization’s checkbook. You’re going to reconcile your beginning and ending balance at the end of the month period.
So yes, it’s really just kind of cash outflows there.
Jim Shellenberger
I think too with this Statement of Cash Flows, specific to Nonprofit organizations, Nonprofit organizations have the option for the operating section mark to present indirect or direct method like all organizations do. Or you can you can present your operating activities via the direct method or the indirect method.
Indirect method is more of a reconciliation model where we take that surplus or that deficit, we call it change in net assets, and we reconcile that down to net cash provided or used in operating activities. Or a direct method is cash received from contributions, cash paid for salary, etc.
So unique to the Nonprofits though, if you do elect the direct method,
Correct me if I’m wrong, you don’t have to use the indirect method. That was a change, quite a few years ago. But I don’t see many organizations using that.
Mark Welliver
I think it’s more challenging to prepare a direct cash flow.
Jim Shellenberger
It is.
Mark Welliver
But on the flip side, the benefit is it does provide a little bit more insight, into which actual expense categories your cash inflows and outflows are coming via the operating activities.
Jim Shellenberger
So I do want to remind everybody to remember to send in the questions to the built in chat feature. We love questions as we’re going through here, but we are at the point now where we are going to launch our first polling question. And that first polling question is, Are you attending this webinar as a nonprofit, A. Board member, B. Employee, C. Donor, or D. other?
I wonder what other could be? Oh, I don’t know if you all can see the results. I can see them coming in. Yeah, a lot of others.
Mark Welliver
The auditor needing CPE maybe?
Jim Shellenberger
It might be auditors needing CPE, so we’re going to take a couple seconds here to let you finish answering. Go ahead and get the poll submitted, but also send in those questions.
All right. Wow. Well, first thing I’m pretty impressed is that we have 97% polling response. That’s pretty good. 96%. So it looks like only one individual has a philanthropic mindset and is a Donor. Most people here are noted as Other 44%, Employees with 39%, and we have about 16% Board Members. So, thank you for responding to that.
So now that we talked about the financial statements a little bit, and I do love financial statements. I’m an auditor at heart, not everybody gets to see the financial statements, but something that everybody gets to see for Nonprofit organizations is the IRS Form 990.
So as Alyssa and I were talking, we started discussing a little bit about who’s actually reviewing the 990 and what are they looking for.
So, Alyssa, I’m going to turn it over to you and talk to us a little bit about IRS 990.
Alyssa Irish
Thanks, Jim. When many people hear Form 990, they might think of just the tax return that’s prepared once a year and then filed away. But for a tax exempt organization, Form 990 is more than just a compliance document.
It’s actually a public report that’s going to highlight the organization’s mission and programs, their leadership, their governance, their finances, donors, grant makers and regulators, and the community members, will use it to form an opinion about the organization when they’re reading it. So today we’re going to focus on how to take Form 990 from just a compliance document to a strategic storytelling.
Form 990 matters because it works on three levels. So first, as I mentioned, it is a Compliance document. It shows that the organization met its tax exempt reporting obligations. It’s also a Governance document. It makes the oversight policies, relationships, compensation and things like that visible to the readers so they get a look at the organization’s processes, and it’s also a Public Narrative.
So again, donors, funders, any other readers, they’re going to use this to understand how the resources and programs are connecting to the mission and then looking at the results that are achieved. So the key takeaway here is that a strong Form 990 needs to work on all three of these levels. So as we go through the presentation, we’re going to look at how different audiences are going to review each of these areas.
Jim Shellenberger
I think organizations that think of it simply as a compliance requirement are really missing a huge opportunity from a governance and public perspective.
Alyssa Irish
Absolutely.
So Form 990 has a much broader audience than just the IRS. Each reader is going to approach it with a different question. So an effective review is going to need to look at it through several lenses. So I’ll start with inside the organization talking about management and the board. The main question here is can we defend the filing?
So internally this filing is going to matter to management, the finance team, the program leaders, and of course the board. Management will generally start with a question like is this accurate? Is this consistent? And is it true? They should see it as a representation of the organization, not just simply an accounting product. The numbers, the schedules, and explanations that we have in Form 990 only to tie together.
And it’s important that it is compared with the audited financial statements, the trial balance, the program descriptions, and making sure that that is accurate and consistent with the organization’s website, their current policies, and even their compensation records. So in this case, internally, management is in the best position to catch any language in the 990 that may not reflect how the organization is actually operating.
And the goal here for them would be to catch anything that’s contradicting, that may turn into a question from the public before it’s in front of the public. The board then will ask a different question and say, what does this filing tell us about oversight and risk? So board members need to understand the disclosures. They need to ask informed questions and then really feel comfortable with the process before the return is filed.
So they should pay close attention to things like the governance responses, the process used to review the return, and compensation information, because that’s something that the public is going to view pretty regularly. So if they do identify any issues in their review, they should then take this up with management and make sure that it leads to clear action and addressing the issue.
Jim Shellenberger
I think it’s best when boards and management are really aligned in that process, Alyssa. You know, we’ve worked with organizations before, when they are aligned, it just makes for a better internal process for the 990.
Alyssa Irish
Yes, absolutely.
So then now looking at outside the organization, so really the general public, the question here then becomes more of does this whole story hold together? So the IRS is going to use this for tax administration and compliance purposes. That’s pretty straightforward. Just like they do with For profits. But for 990, the donors and grant makers are probably going to look at the finances, how revenue is coming in, spending patterns, and maybe how leadership is compensated, whereas members of the general public simply could ask, what does this organization do?
How is it funded? Do its resources line up with its mission, how they’re using those resources? So the public is looking at this return as an outsider, and they need to ask whether the mission and leadership story are making sense. They’re going to focus on the programs, the use of resources, executive compensation, and any unusual changes that maybe they don’t see often or something that’s different from the prior year.
Another question is that they may want to see if the organization is relying heavily on a single donor. If they are, it could suggest that that organization might function like a private foundation rather than a public charity. And we will talk about that in a little while when I’m talking about some of the schedules with Form 990. So overall, all of these audiences are reading the same document, but they’re just looking at it through a different lens.
So it’s very important that while the 990 is technically accurate, it also needs to be reviewed from the perspective of an outside reader.
Now I’m just going to spend a little bit of time talking about the different sections of Form 990. Now that we know who’s looking at it and what they’re looking for, let’s talk about specific sections that they’re going to be looking at. So a good place to start is in Part I, which is the Summary. This is the first page of the 990.
This is going to just headline the brief overview of the mission, revenue and expenses and then their assets and liabilities and net assets. So here they’re just going to look at if there’s been a big shift from prior year to the current year, obviously reading the mission and making sure that this summary then agrees to the details through the rest of the return.
In Part III, this is where I said that the organization really should spend time bragging about their accomplishments. So this is where we cover the Mission and program service accomplishments. It’s one of the most important sections in the 990 for storytelling. And these descriptions should explain what the organization has actually accomplished and not just list the activities that they are doing.
In this section, you’ll want to have a strong description just to identify the people or communities served, the scale of the work, and the outcomes, and then obviously how that work advances the mission. And because this section does get a lot of public attention. Using vague language is honestly just a missed opportunity.
Jim Shellenberger
Think of all the organizations, Alyssa, that prepare annual reports. And they put so much time and effort into the annual reports. But then their 990 simply says something like, we serve, or we operate a shelter.
Alyssa Irish
Yes.
Jim Shellenberger
We don’t know how big the shelter is, where the shelter is, how many individuals are served. There’s just a missed opportunity there a lot.
Alyssa Irish
Yeah, absolutely. And yeah, that’s a very good point. We do see things like that where we will end up kind of giving our clients a little bit of a push to update that and say, you know, instead of saying we offer food to people in need, say we served over 1 million meals to 2000 members of the community in central PA.
Moving on to Part VI. This is where the Governance and management and disclosure section is. So here is where the readers should review the board’s independence, their key policies, the conflict of interest practices. And then it’s really worth noting that in this section, sometimes organizations will answer ‘No’ to a lot of questions here, but it doesn’t necessarily mean that they’re non-compliant or they’re not doing things the right way.
So these questions generally just refer to recommended practices, not necessarily legal requirements. So what works best for each organization is going to differ based on the type of organization that they are.
Part VII is focusing on the People. This section is where they report compensation information for current and former officers, directors, trustees, key employees, and highest compensated employees. The readers are going to use this section to consider whether the compensation is reasonable, often compared to industry standards, and this is actually one of the most publicly scrutinized areas of the 990.
So a reader is really looking to see if this if the pay is disproportionately high compared to maybe the organization’s size or their mission. That’s obviously going to raise questions about whether the organization is allocating their resources appropriately. So you really want to make sure that your organization is compensating the officers and employees in line with industry standards.
And then Part IX is the Statement of Functional Expenses that Mark previously discussed. So we see those three categories. In this section we have the program service expenses, management in general, and then fundraising program. Service expenses on this schedule is where a reader is going to go to look at how they should make up the largest percent of expenses, because they do relate directly to the mission.
But it is important to note there’s really no universally mandated threshold for this program service percentage. And each organization is going to be different and should be evaluated independently. So if you’re looking at one organization that’s a food bank versus another, that’s a health care organization. They may have completely different program service expense allocations. And their percentages are very different.
But that’s okay because it works for their organization.
And then moving on to the Schedules, it’s important not to skip the Schedules. They are at the end of the 990. And in the 990, there is a checklist to determine which schedules need to be filed. I’m just going to touch on a few of the most common and what we see here. So Schedule A is where you are going to test the organization’s Public support status.
This is where a tax exempt organization has to meet this test. It requires that at least 33.3% of its funding comes from the public. So this test is calculated over a five year period. And if an organization does fail this test for two consecutive years, it risks losing its Public charity status.
I have actually encountered this situation in the past and had a meeting with the client to discuss the next steps. We did come to an agreement that the way the organization operated was more like a private foundation, which I had mentioned earlier in the presentation, that if an organization is really having just one main donor, that doesn’t really constitute public support.
So they really do, they should be filing as a private foundation, which is a separate form, 990-PF. So that’s what Schedule A is used for. And that’s where a lot of readers are going to go to see what their public support percentage is and how they are passing that test.
Schedule B is reporting to certain Contributors that are above a threshold, but this is not publicly available, so it’s only going to be reviewed internally. Schedule J we see where there might be additional Compensation detail for the people listed in Part VII if their compensation is above the reporting thresholds. Schedule L reports transactions between Interested persons, such as the excess benefits grants, business transactions between related parties.
And then Schedule O is probably one of the most important Schedules as well, because it just gives organizations the space to explain any response that doesn’t fit on pages 1 through 12 of the 990. So this is where you really can explain to your reader what your governance responses are, any unusual changes during the year, or anything they might just misunderstand.
Schedule R is going to report Related Organizations and transactions with those entities. And then there are a few other Schedules that we see sometimes for fundraising events, grants, non-cash contributions, or even just supplemental financial information. So it all depends on what the organization really does and what they’re required to report.
Jim Shellenberger
Alyssa, do you have a favorite schedule?
Alyssa Irish
A favorite schedule?
Jim Shellenberger
Yeah.
Alyssa Irish
I would say Schedule A, because I like seeing how the public support. I know Schedule A is probably one of the most complicated Schedules, but I would say that’s one of my favorites. What about you, Jim?
Jim Shellenberger
I would agree to A. It’s challenging to put together, but it does provide good insight into the support that the public is providing and, I like that.
So we did have one question that came in. So I’m going to ask you both this question. So when an organization, a nonprofit organization is asked to provide financials, what do you give them? So let’s assume it’s a donor. Do you give them a 990 or do you give them the financial statements or do you give them both?
Mark, what do you think?
Mark Welliver
I think it really kind of depends on, I think you have to do your due diligence on your end. And when you get those opportunities, depending on that, I probably start with the 990. And then if they want additional information, provide the actual financial statements. I think if you have an annual report that’s publicly available that you put on your website or, you put together at the end of the year, that’s definitely something that you can, provide in line with the 990.
Jim Shellenberger
Alyssa, I know your answer is going to be provide the 990 because it’s publicly available, right?
Alyssa Irish
Yeah, I was going to say similar to Mark, I would start with the 990 and see if they need any additional information. Sometimes the 990 doesn’t cover everything in the financial statements, and they need both to make an informed decision. But I definitely would start with the 990.
Jim Shellenberger
All right. So I’m going to take just a few minutes here to talk about different levels of services that CPAs can provide to Nonprofit organizations. And really it boils down into three categories, Compilation, Review, and an Audit. So I’m often asked to do an audit of a Nonprofit organization when in fact an audit’s not actually what’s needed or required.
So, just very quickly, a compilation is a CPA report, where there’s no assurance provided. So there’s no testing, there’s no analysis, no inquiries. Simply taking the information of a Nonprofit organization and putting it into the form of a financial statement. One step up from that is what’s called a reviewed financial statement. This provides limited assurance.
Here, the CPA is performing inquiries, doing analytical procedures. Independence does have to be maintained here. And there’s a conclusion about whether any material changes are needed for the statements to be in accordance with generally accepted accounting principles. And then the highest level of assurance, which is a reasonable basis, is called an audit. This is where the CPA will do testing, vouching, confirmations, inquiries, gathering of other information, looking at and evaluating internal controls.
And then ultimately issues an opinion on the financial statements. So those are the three levels of services. How do you know which one you need? The three main areas that I thought of. One, does the nonprofit organization receive federal awards? If you’re over $1 million, you’re required to have a single audit, which is an audited financial statement.
As you’re looking at funding and funding applications and new donors looking at those requirements, that could be an audit, could be a review, or it could be a compilation. So looking at the detail in the fine print with your grant agreements, etc. And then recently we have been seeing a lot more grant specific audits. So it’s kind of a closer look at financial statements at the grant level,
which is a requirement of some grant agreements. Other places where the requirement comes from is the Pennsylvania Bureau of Charitable Organizations. If you have external lenders that have certain covenants and some bylaws will actually specify the level of CPA service to be performed on financial statements.
The Pennsylvania Bureau of Charitable Organizations I mentioned earlier does require CPA services in Pennsylvania for those organizations who have gross contributions at different levels. I put those levels on the screen here. I’m not going to spend any time on that. But just note, based on the amount of gross contributions that are received, it would require either a compilation review or an audit.
And then just from a 990 perspective, there are three different types of 990s, plus the 990-PF that Alyssa has mentioned a few times. Which one you file depends on your gross receipts and your gross assets. And if your gross receipts are less than 5$0,000, you can file a postcard filing. If you are under $200,000 of gross receipts and total net assets under half a million, a short form 990-EZ. But most organizations are filing a full Form 990.
So with that, I’m going to launch the second polling question. And it’s a simple ‘Yes, No’ answer. Do you enjoy reading nonprofit financial statements? I know how I would answer this.
Mark Welliver
And I think, going back to some of those slides an important item to point out, those different levels of services and the corresponding deliverables, they follow various different benchmarks. So I think your level of service requirement could get lost in translation. You know, your federal award single audit are based on expenditures, whereas your BCO-10 is going to be based on gross contributions. Yeah. And then make things complicated, your 990 is gross receipts and or total assets.
So it is it’s a little bit challenging and confusing. So, just I think beware of that.
Jim Shellenberger
We’ll give five more seconds for the polling question. We got about 95% response rate at this point.
Great. Well, 60% of you do enjoy reading nonprofit financial statements. So if you’re looking for somebody to have coffee with, certainly reach out to me. We can talk about that going forward.
So Mark, I’m going to turn this over to you. And I want you to answer the question for us. How do we actually get good information out of Nonprofit financial statements?
Mark Welliver
Yeah. I think once you get a really good kind of foundation, of knowledge and you get comfortable with those financial statements, there’s a plethora of information that you can pull from a set of financial statements.
I won’t get into all of them. I’m just going to focus, for purposes of this presentation, on really the statement of financial Position in the statement of Activities. But again, you know, it’s endless. I think, you can find whatever you want to. So starting with your Statement of Financial Position.
This is where I think you can really get the story behind the financial health of an organization. So think liquidity, your net asset composition, just overall financial flexibility. When I review a set of financial statements from a nonprofit, I look at that current ratio, and I think a lot of users are going to go straight to that current ratio when we’re talking about liquidity.
So it’s comparing those liquid assets, your current assets, to your current liabilities, to make sure that you have enough assets to cover your immediate obligations within that next year. Another one, metric, is actually the availability of resources. And I’ve actually grown a little bit more fond of it through the years. What that does is, it’s going to take your current assets and it could add into, if you have investments, on your balance sheet, it could add that into it.
And then it’s going to carve out any kind of restrictions, to get you to an ultimate amount of what financial resources you have available for really to spend in the future. I actually like to take that step further and then look at that statement of functional expenses. Because that’s going to be your overall operating expenses.
For most people, it’s going to be a year. And then get your monthly operating expenses and then actually compare that to what availability resource you have at that balance sheet date to see how many, you know, if something were to happen where the money stops flowing in, how many, really how many months can you operate without new revenue coming in?
I think typically, I think it’s recommended about 3 to 6 months for that metric. So just something that you can also look at when you’re reviewing your financial statements. The other piece is your net asset composition, whether you’re heavily weighted to net assets without donor restrictions or if you’re heavily weighted on net assets with restrictions, that’s also something that you can garner from the Statement of Financial Position.
I think from a board perspective or management perspective, if you see that being weighted towards that net assets with donor restrictions, you’re going to have to be a little bit more intentional in how you’re going to use those funds, versus your unrestricted funds to continue your operations. And then as far as the financial flexibility, just focusing on that net asset figure again.
Again, that’s the leftovers on your Statement of Financial Position. So if you have a significant portion of leftovers when you’re looking at your Statement of Financial Position, but most of those are comprised of PP&E, like if you have land and building, multiple different vehicles, and then you have very little liquid assets, that’s also going to be a good indicator of how much flexibility you truly do have.
And with that in mind, I do want to kind of highlight some of the red flags. I think I kind of alluded to. The first one is related to that current ratio. So if you’re stepping back and you’re doing this financial review, again, it’s not just one time review. You should be doing this periodically throughout the year so you can identify trends, negative trends, positive trends, and then, alter course when, when need be.
But the first one with current ratio, you just want to monitor your current liabilities aren’t growing faster than your current assets and therefore your current assets going to reduce. I think industry recommendations are about 1.5 to 2 current assets compared to your current liabilities. So if you see yourself, your organization, getting close to that 1 to 1 ratio, that’s when, more intentional and deliberate conversations are going to be required to address that negative from there.
Also, again, I kind of alluded to it with the net assets. But if you start seeing your unrestricted net assets declining, or you have little liquid assets, composing your net assets without donor restrictions, that’s also going to be a negative trend that you want to watch out for. And then ultimately, if you do have a board designated reserve, you just want to make sure that that is your last case, break the glass scenario.
And now the Statement of Activities, you can get more performance, I think, related metrics here. I think for the most part, the most common one is a budget to actual, comparison. Management boards spend a significant amount of time coming up with that annual budget. So it’s right to track that one pretty stringently because a lot of time and attention gets put into that budget.
So obviously you want to make sure that revenues are tracking, they’re not performing below budget, above budget, expenses, same thing. And again, it’s a trend analysis. It’s not just a one time evaluation. You want to monitor that throughout the year. Another good performance metric is actually your operating margins. So if we go back, that change in assets.
I’ll call it more of an operating margin. So I’ve seen this reported a couple different ways as an organization wide at the organization level or monitoring it by department or by program. I think the more detail you can get into, the better, because it could unravel whether a department is self-sustaining or if it’s being supplemented by maybe another department or maybe some investment funds.
And then the last thing I’ll touch on is just the revenue diversification. You always want to look at where that revenue is coming from and make sure that you’re not fully concentrated into a single revenue stream, whether that’s grant revenue, program service fees, membership dues. You want to you want to have a good diversification and not really too much exposure to one particular area there.
Jim Shellenberger
Mark, I’m going to move us into our next section here, out of respect for all of our attendees’ time.
So, listen, I’m going to just kick you over with the next question here. So, you know, we talked about storytelling earlier, but what are some other ways to make your IRS Form 990 stand out and ultimately compliment the financial statements?
Alyssa Irish
Yeah. I’ll quickly touch on some of the most common reconciliation points that we see. So generally Form 990 is going to present the financial information directly from the financial statements. There are going to be certain items that are reported differently. And that’s just because the financial statements are often prepared under GAAP, which is generally accepted accounting principles.
But Form 990 follows IRS requirements. So the most common reconciliation points are Investment Expenses, Donated Services, Unrealized Gains and Losses, and Fundraising Expenses. So Form 990 will take Investment Expenses and put them on the Statement of Functional Expenses. Whereas for the financials, those will just be netted against investment income in the revenue section. Donated services, for GAAP purposes, those are recorded as revenue and expenses.
Whereas on the 990 those are not included in either revenue or expenses. They are actually reconciled later. And I have an example on the next slide for these as well. Unrealized Gains and Losses are included in investment revenue for GAAP purposes, but they are excluded from revenue on the 990 and reconciled later on page 12. And then Fundraising Expenses can either be gross or net of fundraising revenue for financial statement purposes, but netted against revenue on the Statement of Revenue for the 990.
So here is just an example of page 12 where we reconcile net assets. We start with revenue and expenses on the 990. We take net assets at the beginning of the year, and then we adjust for those changes like net unrealized gains and losses, donated services, investment expenses and any other changes. We also have a reconciliation on Schedule D, which is not always required, but it is required when you have separate audited financial statements.
So here we have the same thing. We start with revenue per financial statements reconciled down to the revenue per to the 990, and the same with the expenses. So we’ll do that and put in those adjustments for the fundraising expenses, investment expenses, unrealized gains and losses, and any other adjustments that are necessary here. And again, it’s not required unless you have separate independent audited financial statements.
But it can be helpful to still fill this out when you do have several reconciling items that might help the reader understand better what’s going on.
And we did already talk a little bit about how to tell the nonprofit’s story. So I’ll just touch on this pretty briefly. As I mentioned, using Part III to tell your story is the most important part. You start with why you exist, who you serve, and then the difference that you make. So you should highlight accomplishments that are going to show the impact of your work and share the details that you can back up using specific facts to help build trust with the public. And then the expenses in this section should also help readers understand how you use resources to turn those into results. Another thing to mention is just to keep the language consistent. So program names, mission terms, descriptions, they should align across every document and even the website. So the 990, the annual report, website, everything should really be consistent.
And you want to know, could a first time reader just retell this story. Like was it simple? Was it easy enough to understand? So overall the Form 990 that’s going to stand out, it’s not necessarily going to be the one that has the most words. It’s just the one where everything tells a cohesive story.
Jim Shellenberger
So with that, I’m going to launch the third polling question. So when reading IRS 990, the first page I turn to is.
I know I go right to the board member listing. I want to see my name.
Give everybody about 10 seconds to answer this third polling question.
All right. Get your answers in. Only about 97% of you have voted. So just about everybody is in.
So Program Service Accomplishments, Alyssa’s favorite part. Page II gets the winner there. Excellent. So we’re going to move into our last section, which, if you know me, I hate the term best practices. So I always use the word effective practices. And Mark and Alyssa both listed off a whole bunch for me to go over here today, but I’m going to limit them to one each.
Mark, why don’t you talk a little bit about KPIs real quickly before, I let Alyssa finish up?
Mark Welliver
Yeah. KPIs are Key Performance Indicators. They’re going to be good and useful too, tool in decision making process process a lot more effective and efficient. By just driving more deliberate conversations.
Jim Shellenberger
Yeah, I know, Mark, you work with a number of organizations that have some really cool dashboarding and reporting dashboards that they use to the report out their metrics. It’s pretty neat.
And, Alyssa, I know you want to talk about one of your effective practices, which is around, a review of the 990.
Alyssa Irish
Yeah. Actually, Jim, if you want to skip ahead two slides, I can kind of summarize this whole thing as really the framework for reviewing a 990. The process is to review, use the return as a governance conversation internally, between the management and the board and oversight, and then reconcile to make sure that the 990 does agree with the financial statements and any other filings or the website to make sure that everything is consistent.
And then make sure that the mission, the outcomes, and the context are really easy for an outsider to understand. Here, I think the key takeaway is that when all of the groups work together, the 990 can do more than just satisfy that compliance requirement.
It can really strengthen oversight and just reinforce public trust.
Jim Shellenberger
That’s awesome. Melissa, I totally agree. I was skeptical of the 990 when I started my career 25 years ago, but I’ve fallen in love with it. As much as you can fall in love with an IRS form.
So we’re going to launch our last polling question. I know a number of you are here for CPE, so why don’t you let me know if you are here for CPE?
Would you like to receive it? Go ahead and answer that question. Last polling question and I’ll be quiet for about 10-15 seconds.
So go ahead and get your last response in there.
All right. Looks like we got 97% have voted. So that’s pretty good turnout.
Great.
Well I appreciate everybody who has submitted questions. Mark, Alyssa, and I will get back to you after the webinar. So I do appreciate those who have sent questions in.
As you can tell, Mark, Alyssa, and I are very passionate about Nonprofit Financial Statements and 990s and would love to have the opportunity to connect with you afterwards. So our contact information is on the screen for you.
But I would like to thank you for joining us for today’s webinar. If you have any further questions, again, reach out to us. Our team is happy to assist you and have a conversation.
A recording of today’s presentation will be posted on our website and all of our social media sites. And for those of you have asked for CPE and answered all the polling questions, those certificates will be sent out within the next month.
I have a reminder for a couple upcoming events our firm is hosting. So on November 5th is our Fall Affordable Housing seminar. Registration is open for this in-person event, where AJ Johnson will be returning to cover what light tech property owners should know about the IRS form 8609, and any issues that are critical to success of a LIHTC acquisition/rehab project.
Our webinar series will continue on November 19th. The registrations open for our upcoming AEC webinar, Blueprints for Success a 2026-2027 Tax, Accounting, and Industry Update. Our wonderful AEC team will explore practical tax saving opportunities, key accounting considerations, and innovative software solutions. And then, not to be outdone, our final webinar of the year will focus on the Federal Tax Update with my partner, Mark Heath. Mark is our Partner and Director of Tax Services, and he is going to cover recent tax legislation, its impact on 2026 business and individual tax returns, and help you plan accordingly.
So I encourage you to register for that today. So again, I like to thank you for joining us in today’s webinar. Mark, Alyssa, and I have had a wonderful time speaking with you and look forward to connecting again in the future.
