Chapter 18
Example Set 1

The following examples refer to a trade association, the Society of American Associations. The examples present the comparative financial statements for the years that ended December 31, 2016 and 2015.

Example 1A: Prepared using accounting guidance before the adoption of ASU 2016-14.

Example 1B: Prepared after the adoption of ASU 2016-14.

Exercise 1A: Working with Financial Statements

Use the financial statements in Example 1A for the Society of American Associations to familiarize yourself with a basic nonprofit financial statement that presents full comparative information for two years.

Begin by looking at the independent auditor's report:
1. What type of opinion is this?
  ____________________________________________
  
  ____________________________________________
2. What period is covered by the report?
  ____________________________________________
  
  ____________________________________________
Locate the (1) Statements of Financial Position, (2) Statements of Activities, and (3) Statements of Cash Flows:
1. How much are total current assets on December 31, 2016?
  ____________________________________________
  
  ____________________________________________
2. How much are total noncurrent assets on December 31, 2016?
  ____________________________________________
  
  ____________________________________________
3. How much are total liabilities on December 31, 2016?
  ____________________________________________
  
  ____________________________________________
4. How much are total unrestricted net assets on December 31, 2016?
  ____________________________________________
  
  ____________________________________________
5. What is the organization's change in net assets (bottom line) for the organization's year that ended on December 31, 2016 (FY 2016)?
  ____________________________________________
  
  ____________________________________________
Focusing on the Statements of Financial Position:
1. Has the organization's current ratio (current assets/current liabilities) improved or declined from FY 2015 to FY 2016?
  ____________________________________________
  
  ____________________________________________
2. How much does the organization have in long-term investments on December 31, 2016?
  ____________________________________________
  
  ____________________________________________
3. How much are total prepaid expenses—annual meeting?
  ____________________________________________
  
  ____________________________________________
4. What is the allowance for uncollectible accounts receivable on December 31, 2016?
  ____________________________________________
  
  ____________________________________________
5. What is the organization's largest liability?
  ____________________________________________
  
  ____________________________________________
Moving to the Statements of Activities:
1. How does the change in unrestricted net assets from operations for FY 2016 compare to those for FY 2015?
  ____________________________________________
  
  ____________________________________________
2. What is the key source of revenue?
  ___________________________________________
  
  ___________________________________________
3. What was the amount of the change in net assets from operations for the year that ended on December 31, 2016?
  ___________________________________________
  
  ____________________________________________
4. What was the net investment return for FY 2016 versus FY 2015?
  ___________________________________________
  
  ____________________________________________
5. What was the amount of the change in net assets for FY 2016 versus the amount of the change in net assets for FY 2015?
  ___________________________________________
  
  ____________________________________________
On to the Statements of Cash Flows:
1. What method of presentation did the organization use for the statement?
  ___________________________________________
  
  ___________________________________
2. What was the amount of cash and cash equivalents provided by or used in operating activities during FY 2016?
  ___________________________________________
  
  ____________________________________________
3. Which section of the statement would you look to for information on purchases of property and equipment? Did the organization spend more or less cash on purchases of property and equipment in FY 2016 than in FY 2015?
  ___________________________________________
  
  ____________________________________________
4. Which section of the statement would you look to for information on purchases of investments? Did the organization spend more or less cash on purchases of investments in FY 2016 than in FY 2015?
  ___________________________________________
  
  ___________________________________________
5. Is the organization's cash position better or worse on December 31, 2016 versus December 31, 2015?
  ___________________________________________
  
  ___________________________________________
And do not forget the footnotes:
1. Where can you find information regarding all the significant accounting policies used by the organization?
  ____________________________________________
  
  ___________________________________________
2. Which footnotes discuss the new accounting pronouncement adopted during FY 2016 related to the investments?
  ___________________________________________
  
  ___________________________________________
3. What portion of the investment return for FY 2016 is related to realized losses? Where do you find this information?
  ___________________________________________
  
  ___________________________________________
4. What portion of the investment return for FY 2016 is related to unrealized losses? Where do you find this information?
  ___________________________________________
  
  ___________________________________________
Among the most important issues revealed by the financial statements are the following:
___________________________________________

___________________________________________

Exercise 1A: Answers

Begin by looking at the independent auditor's report:
1. What type of opinion is this?
  Unmodified opinion on comparative financial statements.
2. What period is covered by the report?
  The years ended December 31, 2016 and 2015.
Locate the (1) Statements of Financial Position, (2) Statements of Activities, and (3) Statements of Cash Flows:
1. How much are total current assets on December 31, 2016?
  $50,391,067.
2. How much are total noncurrent assets on December 31, 2016?
  $89,820,461.
3. How much are total liabilities on December 31, 2016?
  $71,033,113.
4. How much are total unrestricted net assets on December 31, 2016?
  $69,178,415.
5. What is the organization's change in net assets (bottom line) for the organization's year that ended on December 31, 2016 (FY 2016)?
  $(13,879,281).
Focusing on the Statements of Financial Position:
1. Has the organization's current ratio (current assets/current liabilities) improved or declined from FY 2015 to FY 2016?
  It declined from .74 for FY 2015 to .71 for FY 2016. The current ratio is calculated by dividing the current assets by the current liabilities.
2. How much does the organization have in long-term investments on December 31, 2016?
  $44,849,774.
3. How much are total prepaid expenses—annual meeting?
  $16,395,499 (current portion of $16,288,599 plus noncurrent portion of $106,900).
4. What is the allowance for uncollectible accounts receivable on December 31, 2016?
  $23,829.
5. What is the organization's largest liability?
  Deferred revenue.
Moving to the Statements of Activities:
1. How does the change in unrestricted net assets from operations for FY 2016 compare to those for FY 2015?
  The change in unrestricted net assets from operations has declined from an increase of $13,435,432 in FY 2015 to a decrease of $(516,379) in FY 2016. Revenues decreased 12 percent while expenses increased 4 percent.
2. What is the key source of revenue?
  Annual meeting.
3. What was the amount of the change in net assets from operations for the year that ended on December 31, 2016?
  A decrease of $(516,379).
4. What was the net investment return for FY 2016 versus FY 2015?
  The organization experienced negative net investment return in the amount of ($13,362,902) for FY 2016 compared to a positive net investment return in the amount of $2,884,198 in FY 2015. This information appears in the statements of activities and in Note 3 in our example.
5. What was the amount of the change in net assets for FY 2016 versus the amount of the change in net assets for FY 2015?
  Change in net assets for FY 2016 was a negative ($13,879,281) compared to a positive change in net assets for FY 2015 in the amount of $16,319,630.
On to the Statements of Cash Flows:
1. What method of presentation did the organization use for the statement?
  Indirect method.
2. What was the amount of cash and cash equivalents provided by or used in operating activities during FY 2016?
  The cash provided by operating activities was $6,454,226.
3. Which section of the statement would you look to for information on purchases of property and equipment? Did the organization spend more or less cash on purchases of property and equipment in FY 2016 than in FY 2015?
  Cash flows from investing activities. The organization spent less cash on purchases of property and equipment in FY 2016 than FY 2015. The organization used cash of $1,301,002 in FY 2016 and $6,194,088 in FY 2015.
4. Which section of the statement would you look to for information on purchases of investments? Did the organization spend more or less cash on purchases of investments in FY 2016 than in FY 2015?
  Cash flows from investing activities. The organization spent more on purchases of investments in FY 2016. The organization used cash of $74,168,305 in FY 2016 and $30,839,230 in FY 2015.
5. Is the organization's cash position better or worse on December 31, 2016 versus December 31, 2015?
  The cash position is better in 2016. It increased by $1,478,602.
And do not forget the footnotes:
1. Where can you find information regarding all the significant accounting policies used by the organization?
  In the summary of accounting policies at the beginning of the footnotes.
2. Which footnotes discuss the new accounting pronouncement adopted during FY 2016 related to the investments?
  In the recent accounting pronouncements adopted in the summary of accounting policies and AnsNote 2.
3. What portion of the investment return for FY 2016 is related to realized losses? Where do you find this information?
  $4,743,114 of realized losses per Note 3.
4. What portion of the investment return for FY 2016 is related to unrealized losses? Where do you find this information?
  $10,670,481 of unrealized losses per Note 3.
Among the most important issues revealed by the financial statements are the following:
- The dependence of the organization on a single source of revenue, the annual meeting, is a serious concern. It is clear that the organization would do well to diversify its revenue streams in a substantial manner. The fact that revenues from the meeting declined by more than $10M while expenses increased by $3.2M is quite disconcerting. This situation is critical to resolve given the organization's dependence on the annual meeting as a source of both gross and net income.
- While the net investment loss was the most obvious blow to the financial strength of the organization, it was the result of a diversified portfolio being hit by unusually severe fluctuations in the market. A diversified investment portfolio has generally proven to be a good policy for assets that are being held for the long term. Thus, any major change in this area should be undertaken only with professional advice.
- The organization appears to have a liquidity problem since in both years current liabilities are in the range of $20M greater than current assets. This is mitigated in part by the existence of the money market and mutual funds being held as part of the long-term investments. However, if cash were needed on an emergency basis, the sale of these liquid assets could be forced while in a down market. The organization would do well to have borrowing capacity available in the form of a line-of-credit to see it through any such emergency.
- The organization cannot manage the return on investments as well as it can manage the income from operations ((decrease) increase in unrestricted net assets from operations). This is one of the major reasons the organization has chosen to present the investment return as a nonoperating activity in the statements of activities. The fact that the change in net assets from operations went from 15 percent of total revenue to less than 1 percent is among the single gravest issues to be dealt with. Both management and leadership should focus on improving this important figure.

Exercise 1B: Working with Financial Statements

Use the financial statements in Example 1B for the Society of American Associations to familiarize yourself with a basic nonprofit financial statement that presents full comparative information for two years. In this example, the organization has adopted the provisions of ASU 2016-14.

Begin by looking at the independent auditor's report:
1. What type of opinion is this?
  _______________________________________
  
  _______________________________________
2. What period is covered by the report?
  _______________________________________
  
  _______________________________________
Locate the (1) Statements of Financial Position, (2) Statements of Activities, and (3) Statements of Cash Flows:
1. How much are total current assets on December 31, 2016?
  _______________________________________
  
  _______________________________________
2. How much are total noncurrent assets on December 31, 2016?
  _______________________________________
  
  _______________________________________
3. How much are total liabilities on December 31, 2016?
  _______________________________________
  
  _______________________________________
4. How much are total net assets without donor restrictions on December 31, 2016?
  _______________________________________
  
  _______________________________________
5. What is the organization's change in net assets (bottom line) for the organization's year that ended on December 31, 2016 (FY 2016)?
  _______________________________________
  
  _________________________________________
Focusing on the Statements of Financial Position:
1. Has the organization's current ratio (current assets/current liabilities) improved or declined from FY 2015 to FY 2016?
  _______________________________________
  
  _______________________________________
2. How much does the organization have in long-term investments on December 31, 2016?
  _______________________________________
  
  _______________________________________
3. How much are total prepaid expenses—annual meeting?
  _______________________________________
  
  _______________________________________
4. What is the allowance for uncollectible accounts receivable on December 31, 2016?
  _______________________________________
  
  _______________________________________
5. What is the organization's largest liability?
  _______________________________________
  
  _______________________________________
Moving to the Statements of Activities:
1. How does the change in net assets without donor restrictions from operations for FY 2016 compare to those for FY 2015?
  ___________________________________________
  
  ___________________________________________
2. What is the key source of revenue?
  ___________________________________________
  
  _______________________________________
3. What was the amount of the increase or decrease in the change in net assets from operations for the year that ended on December 31, 2016?
  ___________________________________________
  
  _______________________________________
4. What was the net investment return for FY 2016 versus FY 2015?
  _______________________________________
  
  ________________________________________
5. What was the amount of the change in net assets without donor restrictions for FY 2016 versus the amount of the change in net assets without donor restrictions for FY 2015?
  _______________________________________
  
  _______________________________________
On to the Statements of Cash Flows:
1. What method of presentation did the organization use for the statement?
  _______________________________________
  
  _______________________________________
2. What was the amount of cash and cash equivalents provided by or used in operating activities during FY 2016?
  _______________________________________
  
  _______________________________________
3. Which section of the statement would you look to for information on purchases of property and equipment? Did the organization spend more or less cash on purchases of property and equipment in FY 2016 than in FY 2015?
  _______________________________________
  
  _______________________________________
4. Which section of the statement would you look to for information on purchases of investments? Did the organization spend more or less cash on purchases of investments in FY 2016 than in FY 2015?
  _______________________________________
  
  _______________________________________
5. Is the organization's cash position better or worse on December 31, 2016 versus December 31, 2015?
  _______________________________________
  
  _______________________________________
And do not forget the footnotes:
1. Where can you find information regarding all the significant accounting policies used by the organization?
  _______________________________________
  
  _______________________________________
2. Which footnotes discuss the new accounting pronouncement adopted during FY 2016 related to the investments?
  _______________________________________
  
  _______________________________________
3. What portion of the investment return for FY 2016 is related to realized losses? Where do you find this information?
  _______________________________________
  
  _______________________________________
4. What portion of the investment return for FY 2016 is related to unrealized losses? Where do you find this information?
  _______________________________________
  
  _______________________________________
5. Where would you find information on the total financial assets available within one year of the Statements of Financial Position date for general expenditures?
  _______________________________________
  
  _______________________________________
6. What is the amount of the Society's financial assets available within one year of the Statements of Financial Position date for general expenditures?
  _______________________________________
  
  _______________________________________
Which components of the financial statements reflect the adoption of ASU 2016-14?
1. _______________________________________
2. _______________________________________
Among the most important issues revealed by the financial statements are the following:
1. _______________________________________
2. _______________________________________

Exercise 1B: Answers

Begin by looking at the independent auditor's report:
1. What type of opinion is this?
  Unmodified opinion on comparative financial statements.
2. What period is covered by the report?
  The years ended December 31, 2016 and 2015.
Locate the (1) Statements of Financial Position, (2) Statements of Activities, and (3) Statements of Cash Flows:
1. How much are total current assets on December 31, 2016?
  $50,391,067.
2. How much are total noncurrent assets on December 31, 2016?
  $89,820,461.
3. How much are total liabilities on December 31, 2016?
  $71,033,113.
4. How much are total net assets without donor restrictions on December 31, 2016?
  $69,178,415.
5. What is the organization's change in net assets (bottom line) for the organization's year that ended on December 31, 2016 (FY 2016)?
  $(13,879,281).
Focusing on the Statements of Financial Position
1. Has the organization's current ratio (current assets/current liabilities) improved or declined from FY 2015 to FY 2016?
  It declined from .74 for FY 2015 to .71 for FY 2016. The current ratio is calculated by dividing the current assets by the current liabilities.
2. How much does the organization have in long-term investments on December 31, 2016?
  $44,849,774.
3. How much are total prepaid expenses—annual meeting?
  $16,395,499 (current portion of $16,288,599 plus noncurrent portion of $106,900).
4. What is the allowance for uncollectible accounts receivable on December 31, 2016?
  $23,829.
5. What is the organization's largest liability?
  Deferred revenue.
Moving to the Statements of Activities:
1. How does the change in net assets without donor restrictions from operations for FY 2016 compare to those for FY 2015?
  The change in net assets without donor restrictions from operations has declined from an increase of $13,435,432 in FY 2015 to a decrease of $(516,379) in FY 2016. Revenues decreased 12 percent while expenses increased 4 percent.
2. What is the key source of revenue?
  Annual meeting.
3. What was the amount of the increase or decrease in the change in net assets from operations for the year that ended on December 31, 2016?
  A decrease of $(516,379).
4. What was the net investment return for FY 2016 versus FY 2015?
  The organization experienced negative net investment return in the amount of ($13,362,902) for FY 2016 compared to a positive net investment return in the amount of $2,884,198 in FY 2015. This information appears in the statements of activities and in Note 3 in our example.
5. What was the amount of the change in net assets without donor restrictions for FY 2016 versus the amount of the change in net assets without donor restrictions for FY 2015?
  Change in net assets without donor restrictions for FY 2016 was a negative ($13,879,281) compared to a positive change in net assets without donor restrictions for FY 2015 in the amount of $16,319,630.
On to the Statements of Cash Flows:
1. What method of presentation did the organization use for the statement?
  Direct method.
2. What was the amount of cash and cash equivalents provided by or used in operating activities during FY 2016?
  The cash provided by operating activities was $6,454,226.
3. Which section of the statement would you look to for information on purchases of property and equipment? Did the organization spend more or less cash on purchases of property and equipment in FY 2016 than in FY 2015?
  Cash flows from investing activities. The organization spent less cash on purchases of property and equipment in FY 2016 than FY 2015. The organization used cash of $1,301,002 in FY 2016 and $6,194,088 in FY 2015.
4. Which section of the statement would you look to for information on purchases of investments? Did the organization spend more or less cash on purchases of investments in FY 2016 than in FY 2015?
  Cash flows from investing activities. The organization spent more on purchases of investments in FY 2016. The organization used cash of $74,168,305 in FY 2016 and $30,839,230 in FY 2015.
5. Is the organization's cash position better or worse on December 31, 2016 versus December 31, 2015?
  The cash position is better in 2016. It increased by $1,478,602.
And do not forget the footnotes:
1. Where can you find information regarding all the significant accounting policies used by the organization?
  In the summary of accounting policies at the beginning of the footnotes.
2. Which footnotes discuss the new accounting pronouncement adopted during FY 2016 related to the investments?
  In the recent accounting pronouncements in the summary of accounting policies and Note 2.
3. What portion of the investment return for FY 2016 is related to realized losses? Where do you find this information? (As noted, once the entity adopts ASU 2016-14, this information will no longer be required to be disclosed. In our example, the disclosure was still provided, but it is not required.)
  $4,743,114 of realized losses per Note 3.
4. What portion of the investment return for FY 2016 is related to unrealized losses? Where do you find this information? (As noted, once the entity adopts ASU 2016-14, this information will no longer be required to be disclosed. In our example, the disclosure was still provided, but it is not required.)
  $10,670,481 of unrealized losses per Note 3.
5. Where would you find information on the total financial assets available within one year of the Statements of Financial Position date for general expenditures?
  In the summary of accounting policies note under the heading liquidity and availability.
6. What is the amount of the Society's financial assets available within one year of the Statements of Financial Position date for general expenditures?
  $69,170,127.
Which components of the financial statements reflect the adoption of ASU 2016-14?
- Change in terminology from unrestricted net assets to net assets without donor restrictions.
- Liquidity and Availability note in the Summary of Accounting Policies (the entity had already included this before the adoption but other entities may have not).
- Functional allocation methodology for expenses is included in the Summary of Accounting Policies.
- The effect of adopting ASU 2016-14 is included in the Summary of Accounting Policies.
- The information in Note 3, Investment Return, could be removed as noted.
- The required analysis of expenses by function and nature was included as Note 7.
Among the most important issues revealed by the financial statements are the following:
- The dependence of the organization on a single source of revenue, the annual meeting, is a serious concern. It is clear that the organization would do well to diversify its revenue streams in a substantial manner. The fact that revenues from the meeting declined by more than $10M while expenses increased by $3.2M is quite disconcerting. This situation is critical to resolve given the organization's dependence on the annual meeting as a source of both gross and net income.
- While the net investment loss was the most obvious blow to the financial strength of the organization, it was the result of a diversified portfolio being hit by unusually severe fluctuations in the market. A diversified investment portfolio has generally proven to be a good policy for assets that are being held for the long term. Thus, any major change in this area should be undertaken only with professional advice.
- The organization appears to have a liquidity problem since in both years current liabilities are in the range of $20M greater than current assets. This is mitigated in part by the existence of the money market and mutual funds being held as part of the long-term investments. However, if cash were needed on an emergency basis, the sale of these liquid assets could be forced while in a down market. The organization would do well to have borrowing capacity available in the form of a line-of-credit to see it through any such emergency.
- The organization cannot manage the return on investments as well as it can manage the income from operations ((decrease) increase in net assets without donor restrictions from operations). This is one of the major reasons the organization has chosen to present the investment return as a nonoperating activity in the statements of activities. The fact that the change in net assets from operations went from 15 percent of total revenue to less than 1 percent is among the single gravest issues to be dealt with. Both management and leadership should focus on improving this important figure.