Understanding Nonprofit Financial Statements and the Form 990

Category 

General

By: Kristin Clayton, CPA and Katie New, CPA

Many nonprofit board members and employees come from a for-profit, corporate background. While this may lay the groundwork for reviewing and understanding financial statements and tax returns, nonprofit organizations have unique accounting and reporting nuances that can make the transition more complicated than expected. Of the four primary statements that nonprofits are required to present, two have titles that differ from their for-profit equivalents, and one is even unique to nonprofits.

Statement of Financial Position = Balance Sheet

The Statement of Financial Position includes assets, liabilities, and net assets. There is no requirement for nonprofits to show current assets or current liabilities so typically those are not identified. Rather, assets and liabilities are listed in order of liquidity. Net assets include amounts without donor restrictions and with donor restrictions. These classifications are somewhat self-explanatory in that net assets without donor restrictions means that the entity may use those net assets for any program or administrative costs, and they may be used at any time. Net assets with donor restriction are restricted by the donor to be used only for a specific purpose or during a future period. Net assets with donor restrictions would also include amounts to be held in perpetuity as required by the donor. Any board designated amounts or endowments would be classified as without donor restriction since the board is able to change those designations at any time.

Statement of Activities = Income Statement

The Statement of Activities includes revenues and expenses. It must also show the change in net assets for both net assets without donor restrictions and net assets with donor restrictions along with a total change in net assets. Once donor restricted amounts are used for their required purpose or as time has passed and the restricted amounts become available, a release of restriction is shown in the Statement of Activities as a reduction from net assets with donor restrictions and an increase in net assets without donor restrictions. Because net assets with donor restrictions are not available until released, the Statement of Activities will never show expenses of donor restricted amounts. Instead the amounts show as a release of restriction with the qualifying expenses showing as a change in net assets without donor restrictions. Expenses may be shown by nature or by function or both in the Statement of Activities. Expenses shown by nature present how the money was spent (salaries, rent, professional fees, etc.).  Expenses shown by function present whether the money was spent towards program, administrative, or fundraising expenses.

Statement of Functional Expenses

The Statement of Functional Expenses is a unique reporting requirement of nonprofits. If the Statement of Activities does not show expenses by both nature and function as discussed in the previous paragraph, a separate statement showing this breakout is required. Expenses of the Organization must be allocated between program services, general and administrative, and fundraising. General and administrative and fundraising costs are called supporting services. Program services may be broken into multiple programs at the discretion of management or the other users of the financial statements. The allocation is a determination made by management and is an estimate. The allocation may be different for different types of expenses. For example, salaries and benefits expense may be based on estimated time and effort spent in each category, while rent expense may be based on square footage used. There is no one required way to allocate costs, but typically time and effort estimates are the most readily available and can be used to estimate allocations for multiple expenses. There may also be expenses that are direct program, general and administrative, or fundraising expenses and those should be reported as such.

Statement of Cash Flows

The Statement of Cash Flows shows the inflows and outflows of cash throughout the time period reported, and consists of operating, investing, and financing activities. Nonprofit organizations have the unique opportunity to report their Statement of Cash Flows using either the direct or indirect method. The method chosen should be the method that is most user friendly for those reading the financial statements. The direct method reports cash provided by and used for various activities. The indirect method starts with the change in net assets and then reconciles that amount to the cash provided by or used for operating activities.

The statements noted above are required for financial statements presented in accordance with generally accepted accounting principles in the U.S. (GAAP). If your entity presents using cash basis or modified cash basis of accounting this will impact the statements included and how assets and liabilities are reported. The method of accounting, unless GAAP is required by an external reporting requirement (typically a result of loans or grants), should be what is most useful to those reading the financial statements. Those users are typically management and the board and may also include donors, grantors, and other stakeholders. All users of the financial statements should be considered when determining the method of accounting to use.

Management and board members should be reviewing financial statements on a regular basis throughout the year. The timing may be dependent on the activity of the organization, but typically monthly reviews are recommended. The financial statements to be reviewed by management and the board should include comparisons to budget and prior periods when applicable. These internal reports used for management of the organization and fiscal oversight by the board may look different than those that are used for external purposes. Program and development directors should also be reviewing financial statements for their programs or grants on an ongoing basis throughout the year and comparing to budget or other expectations. 

Form 990

IRS Form 990 is the return required for organizations that have been determined to be exempt from income tax.  The return is due the 15^th day of the 5^th month following the end of fiscal year. There is an extension of up to 6 months available. For example, if your year end is December 31^st, your Form 990 is due May 15^th and if you file for an extension the return is due November 15^th. If your year-end is June 30^th, your Form 990 is due November 15^th and if you file for an extension the return is due May 15^th. 

The specific 990 form to be filed is based on gross receipts. If an organization has an average of less than $50,000 gross receipts each year a 990-N is required. Technically, they may file a 990-EZ or full 990. The 990-N is an electronic form that requires only the EIN, tax year, legal name and address, name of principal officer, website address, and confirmation via checkbox that the annual gross receipts are $50,000 or less. Organizations with gross receipts less than $200,000 and assets less than $500,000 are eligible to file 990-EZ which is an abbreviated version of the full Form 990. If gross receipts or assets are over $200,000 or $500,000, respectively, the full Form 990 must be filed.

Page 1 of Form 990 provides a snapshot of the Organization. This is the first opportunity for the Organization to tell its story to those reading it. As the Form 990 is available for public inspection it is important for the 990 to be used as a marketing tool for the Organization rather than just a required form to be filed each year.

Page 2 of the Form reports on the mission and programs of the Organization for the year. Use this page to tout all of your amazing achievements.

Page 3 and 4 are checklists noting which additional schedules may be required. As a board member it is important to know and understand the additional schedules that may be required to ensure you are meeting your fiduciary responsibility. These schedules are lettered A through R and should be attached if indicated here.

Page 5 includes other IRS compliance considerations and will alert the IRS to other forms that may be required to be filed such as 1099s or W-2s.

Page 6 has information regarding the governance, policies, and disclosures of the Organization.  These policies are items that the IRS has deemed important for sound governing practices.

Page 7 lists the Board of Directors, Officers, and certain compensated individuals of the Organization. This list should be all inclusive for anyone that s­­­erved on the Board or as an Officer at any point in time during the year. Titles should be as of year-end.

Pages 8-11 are the financial information and should agree to the information provided on the statements discussed earlier in this article with a few adjustments for 990 purposes.

Page 12 is supplemental information to the financial statement.

Consideration of Users

When considering how best to report your information either in your financial statements or in your Form 990, first consider who will be reading the information as they may have different nonfinancial objectives that can be displayed via these reports. Donors and grantors want to ensure that the mission is in alignment with their own values and goals. They may evaluate the governance structure and policies and procedures and are also likely interested in the Organization’s program accomplishments and community outreach and results. Board members and prospective board members will also be interested in the mission aligning with their personal values but also from a fiduciary responsibility as well.  Board members have a duty to confirm the Organization has the structures and policies in place to comply with all external requirements. The Organization should balance these needs and wants of external parties when considering how best to use the financial statements and Form 990 in telling their unique story.