Chapter 11
Footnotes to Financial Statements

Footnotes play a major role in helping you understand an organization's financial situation. The footnotes begin by highlighting significant accounting policies and then go on to detail matters of significance. Major acquisitions, or changes in operations, are highlighted, as are pension requirements, pending lawsuits, and other significant information. Some financial statements may contain footnotes that are unique to nonprofit organizations. These include footnotes related to contributions receivable, pledges receivable, investments, restricted support and net assets, and joint fundraising costs that provide valuable information about the organization's operations.

Whenever you read a financial statement that contains footnotes, be sure to read the footnotes. A general rule of thumb, you should spend at least as much time reading the footnotes as you do reading the financial statements. The footnotes are the road map to the financial statements and provide the story behind the numbers. The footnotes contain the information that explains many of the significant and material numbers presented in the financial statements and are critical to understanding an organization. The footnotes will often provide the detail for amounts presented at an aggregated level in the face of the financial statements.

Audited financial statements present the accounting policies of the nonprofit organization as the first section of the footnotes. These footnotes will provide the reader with an understanding of the accounting policies being followed by the entity for its assets, liabilities, net assets, revenue, and expenses. Following the accounting policies are other footnotes that support the items presented in the financial statements.

The determination as to what information is included in the footnotes is governed by technical guidance issued by the FASB. Some of the key footnotes that readers should focus on include related-party transactions, contingencies, and subsequent events. If the auditor's report also includes an Other Matters or an Emphasis of a Matter section, readers should refer to the footnote(s) referenced to understand the consequences of these items on the financial statements.

There are several new and enhanced disclosure requirements required once the entity adopts ASU 2016-14. The purpose of these new disclosures is to provide more information and greater transparency in the financial statements, thus making it more important than ever to focus attention on the footnotes.

General highlights of new and enhanced disclosures under ASU 2016-14 include:

  1. Amounts and purposes of governing board designations, appropriations, and similar actions that result in self-imposed limits on the use of resources without donor-imposed restrictions as of the end of the reporting period.
  2. Composition of net assets with donor restrictions at the end of the reporting period and how the restrictions affect the use of resources.
  3. Qualitative information that communicates how a nonprofit manages its liquid resources available to meet cash needs for general expenditures within one year after the Statement of Financial Position (Balance Sheet) date.
  4. Quantitative information, either on the face of the Statement of Financial Position (Balance Sheet) or in the footnotes, and additional qualitative information in the footnotes, as necessary, that communicates the availability of a nonprofit's financial assets at the Statement of Financial Position date to meet cash needs for general expenditures within one year after the Statement of Financial Position date. Availability of a financial asset may be affected by:
    1. Its nature.
    2. External limits imposed by donors, grantors, laws, and contracts with others.
    3. Internal limits imposed by governing board decisions.
  5. Amounts of expenses by both their natural classification and their functional classification. This analysis of expenses is to be provided in one location, which could be on the face of the Statement of Activities, as a separate statement, or in the footnotes to the financial statements.
  6. Method(s) used to allocate costs among program and supporting functions.
  7. Underwater endowment funds, which include required disclosures of:
    1. A nonprofit's policy, and any actions taken during the period concerning appropriation from underwater endowment funds.
    2. The aggregate fair value of such funds.
    3. The aggregate of the original gift amounts (or level required by the donor or law) to be maintained.
    4. The aggregate amount by which funds are underwater (deficiencies), which are to be classified as part of net assets with donor restrictions.