The Fine Print - Decoding Nonprofit Financial Statements Footnotes Disclosure

Importance of the Footnote Disclosure

As a key stakeholder in a nonprofit organization, the review of the financial statements is crucial for assessing the financial health of the organization. These financial statements are often accompanied by the footnote disclosure. The “fine print” provides essential context and details that go beyond the numbers presented in the main financial statements. The disclosure offers insights into the organization’s accounting policies, commitments, contingencies, related party transactions, and any other significant matters that the readers should be aware. By thoroughly reading and comprehending these disclosures, stakeholders can make more informed decision, ensure compliance with regulatory requirements, and maintain trust with donors and other key stakeholders.

What’s Ahead in this Article Series

These articles will be published in three series to capture all relevant information and sections of the footnote disclosures. Each series will provide comprehensive understanding of, but not limited to:

• Series #1 – Learn about the organization, its operation, and its significant accounting policies
• Series #2 – Take a deeper dive into the footnote disclosures that relate back to the main financial statements and understanding the quantitative breakdown of significant account balances
• Series #3 – Capturing all other relevant footnote disclosure such as liquidity, commitments & contingencies, and subsequent events to see what to look ahead in the future beyond the fiscal year

Understanding the Organization and its Significant Accounting Policies

Commonly, the footnote disclosure begins with the explanation of the organization’s operation, mission, and any other affiliated entities to show the readers what is on the drawing board. In the "Organization and Summary of Significant Accounting Policies" section of nonprofit financial statements, several key disclosures are made to provide a comprehensive understanding of the organization's financial practices. This section typically includes information about the organization's mission, structure, and the basis of accounting used in preparing the financial statements. It outlines the significant accounting policies adopted by the organization, such as revenue recognition, expense allocation, and the valuation of assets and liabilities. These disclosures help stakeholders understand the principles and methods applied in the financial reporting process, ensuring consistency and comparability with other organizations. Few items to highlight under this section include, but not limited to, are:

• Consolidation Policy: If financial statements are consolidated, this disclosure will explain which related entities are being consolidated in the financial statements and as to basis (reason) for the consolidation, such as common board of directors, sole ownership, etc.
• Valuation policies for certain assets: This section will provide clear guidance as to how certain assets are valued on the financial statements. For example, valuation of inventories and investments, and property, plants, and equipment.
• Revenue recognition policies: Commonly, nonprofit organizations have multiple revenue streams in addition to grants & contributions. This section of the disclosure explains how each major revenue streams are recognized and the timing of recognition under the revenue recognition standards.

Another important disclosure in this section is the "Recently Adopted Accounting Pronouncements." This part provides information on new accounting standards that the organization has recently implemented. These pronouncements, issued by standard-setting bodies like the Financial Accounting Standards Board (FASB), can significantly impact how financial transactions are recorded and reported. For instance, a new standard might change the way leases are accounted for or how revenue is recognized. By disclosing these changes, the organization ensures that stakeholders are aware of any significant shifts in accounting practices that could affect the financial statements. This transparency helps readers understand the potential implications of these new standards on the organization's financial position and performance.

Understanding the Organization’s Tax-Exempt Status

One crucial aspect disclosed in this section is the organization's tax-exempt status. Nonprofits are often granted tax- exempt status under Internal Revenue Code Section 501(c)(3), which exempts them from federal and state corporate income taxes. Note that according to the IRS Publication 557, there are total 29 types of 501(c) listing. The footnotes will detail the organization's compliance with the requirements to maintain this status, such as restrictions on political activities and the necessity to operate exclusively for charitable, educational, or similar purposes.  Additionally, the footnotes may mention any tax filings the organization is required to submit, such as Form 990, and any potential tax liabilities or contingencies.

Key Takeaways for the Readers

Readers should take away several important points from these footnote disclosures. Firstly, understanding the accounting policies provides insight into how the financial statements are prepared and the rationale behind certain financial decisions. This knowledge is crucial for assessing the organization's financial health and performance accurately. Secondly, the disclosure of tax-exempt status reassures stakeholders that the organization is compliant with regulatory requirements, which is vital for maintaining donor trust and securing funding. Lastly, these footnotes enhance transparency and accountability, allowing stakeholders to make informed decisions based on a complete and accurate picture of the organization's financial situation.

Looking Ahead

Stay tuned for the next article in our series, where we will take a deeper dive into the footnote disclosures that relate back to the main financial statements. We'll explore the quantitative breakdown of significant account balances, providing you with a comprehensive understanding of how these disclosures enhance the transparency and accuracy of nonprofit financial reporting.