Chapter 20
Example Set 3

The following examples refer to an association named the Society of Analysts. The Society has a related foundation, the Society of Analysts Foundation, and presents consolidated financial statements. Collectively, the entity is referred to as the Organization. The Organization had a new auditor in fiscal year 2016 and only single-year financial statements are being presented based on an agreement between the Organization and its external auditor. Despite the lack of comparative information, much insight can still be gained from these statements as you will learn from reviewing the statements and answering the subsequent questions.

Example 3A: Prepared using accounting guidance before the adoption of ASU 2016-14.

Example 3B: Prepared after the adoption of ASU 2016-14.

Exercise 3A: Working with Financial Statements

Use the Society of Analysts and Affiliate consolidated financial statements in Example 3A to familiarize yourself with some of the concepts unique to nonprofit organizations.

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 consolidated Statement of Financial Position:
1. Locate the current and noncurrent portions of contributions receivable. What footnote provides information on the components of contributions receivable? What is the net amount of contributions receivable?
  ____________________________________________
  
  ____________________________________________
2. Locate noncurrent investments. Where can you find information on the types of investments held by the organization? What is the total amount of investments?
  ____________________________________________
  
  ____________________________________________
3. What types of net assets does the organization have? What portion of net assets can be used to fund general operations?
  ____________________________________________
  
  ____________________________________________
4. What is the total amount of unrestricted net assets?
  ____________________________________________
  
  ____________________________________________
5. What is the current ratio (current assets/current liabilities) on December 31, 2016?
  ____________________________________________
  
  ____________________________________________
Locate the consolidated Statement of Activities:
1. What is the total change in temporarily restricted net assets?
  ____________________________________________
  
  ____________________________________________
2. What amount of permanently restricted contributions was received during the year? What does “permanently restricted” mean?
  ____________________________________________
  
  ____________________________________________
3. What is the total amount of net assets released from restrictions? What does this mean?
  ____________________________________________
  
  ____________________________________________
4. Did the organization's total operating revenues exceed operating expenses before net investment return?
  ____________________________________________
  
  ____________________________________________
Moving to the consolidated Statement of Cash Flows:
1. What were the total unrealized and realized losses on investments? In what two places can you find this information?
  ____________________________________________
  
  ____________________________________________
2. What amount did the organization borrow on the line-of-credit during the year? In what section of the statement did you find this information?
  ____________________________________________
  
  ____________________________________________
3. Did cash increase or decrease from FY 2015 to FY 2016?
  ____________________________________________
  
  ____________________________________________
Focusing on the footnotes:
1. What does the organization consider a cash and cash equivalent?
  ____________________________________________
  
  ____________________________________________
2. How does the organization value its investments? What footnotes can you get this information from?
  ____________________________________________
  
  ____________________________________________
3. What is the organization's capitalization policy for property and equipment?
  ____________________________________________
  
  ____________________________________________
4. What is the total amount of furniture and equipment the organization has? What note contains this information?
  ____________________________________________
  
  ____________________________________________
5. What programs are the organization's permanently restricted net assets restricted to? In which note can this be found?
  ____________________________________________
  
  ____________________________________________
6. Describe the Strategic Marketing and Communications program. What note can this be found in?
  ____________________________________________
  
  ____________________________________________
Among the most important issues revealed by the consolidated financial statements are the following:
1. ____________________________________________
2. ____________________________________________

Exercise 3A: Answers

Begin by looking at the independent auditor's report:
1. What type of opinion is this?
  Modified as a result of a departure from generally accepted accounting principles.
2. What period is covered by the report?
  Year ended December 31, 2016.
Locate the consolidated Statement of Financial Position:
1. Locate the current and noncurrent portions of contributions receivable. What footnote provides information on the components of contributions receivable? What is the net amount of contributions receivable?
  Note 4; $121,692.
2. Locate noncurrent investments. Where can you find information on the types of investments held by the organization? What is the total amount of investments?
  Notes 2, 5, and 6; $10,408,931.
3. What types of net assets does the organization have? What portion of net assets can be used to fund general operations?
  Unrestricted, temporarily restricted, and permanently restricted; unrestricted.
4. What is the total amount of unrestricted net assets?
  $5,963,128.
5. What is the current ratio (current assets/current liabilities) on December 31, 2016?
  The current ratio is .32, which is calculated by dividing current assets by current liabilities (905,108/2,800,266) and is considered a weak current ratio.
Locate the consolidated Statement of Activities:
1. What is the total change in temporarily restricted net assets?
  $134,635.
2. What amount of permanently restricted contributions was received during the year? What does “permanently restricted” mean?
  $200,000. These funds must be held in perpetuity and investment income spent in accordance with the donor's intent per the permanently restricted net assets footnote in Note 2, the Summary of Accounting Policies and Note 11.
3. What is the total amount of net assets released from restrictions? What does this mean?
  $184,168. These funds were spent in accordance with the donors' intention, or the time restriction has elapsed.
4. Did the organization's total operating revenues exceed operating expenses before net investment return?
  Yes, by $606,878.
Moving to the consolidated Statement of Cash Flows:
1. What were the total unrealized and realized losses on investments? In what two places can you find this information?
  $(473,478); Statement of Cash Flows and Note 5.
2. What amount did the organization borrow on the line-of-credit during the year? In what section of the statement did you find this information?
  $475,000; cash flows from financing activities.
3. Did cash increase or decrease from FY 2015 to FY 2016?
  Cash increased by $184,945.
Focusing on the footnotes:
1. What does the organization consider a cash and cash equivalent?
  All highly liquid instruments with an original maturity of three months or less that are to be used for current operations, which excludes those held as part of the organization's long-term investments per Note 2, the Summary of Accounting Policies, under the Cash and Cash Equivalents heading.
2. How does the organization value its investments? What footnotes can you get this information from?
  At fair value; Note 2, Summary of Accounting Policies, under Investments and Notes 5 and 6.
3. What is the organization's capitalization policy for property and equipment?
  The organization capitalizes assets with an original cost of $1,000 or greater per Note 2 under the Property and Equipment heading.
4. What is the total amount of furniture and equipment that the organization has? What note contains this information?
  $57,745; Note 7.
5. What programs are the organization's permanently restricted net assets restricted to? In which note can this be found?
  Continuing Education Program and Research Program; Note 11.
6. Describe the Strategic Marketing and Communications program. What note can this be found in?
  Specific marketing and media relations tactics are used to further the organization's members' analyst services to the general public; Note 13.
Among the most important issues revealed by the consolidated financial statements are the following:
- There are several important insights that the consolidated financial statements provide even though they are not comparative.
- Based on a review of the consolidated Statement of Financial Position, you can note that current liabilities exceed the current assets by nearly triple. Although the organization holds mutual funds and other liquid investments in its portfolio, they would need to liquidate these assets if they needed cash for general operations. There may be losses that are realized if the assets needed to be liquidated in a down market. The organization may want to obtain professional investment advice on how to possibly structure some investments as liquid assets that may not have the potential for a loss if they needed to liquidate these quickly.
- Also, as noted in the consolidated Statement of Financial Position, the organization owes $475,000 on its line-of-credit. The line-of-credit is used to offset timing differences between when the cash is received and when amounts are due. The membership dues are paid based on a September 30 due date, so there are often times when cash is needed throughout the year to smooth this out. The organization is incurring interest expense on these borrowings and should analyze this cost in comparison to the potential to restructure the investments as noted earlier to try to smooth these fluctuations out at the lowest possible cost.
- What is clear from the consolidated Statement of Activities is that the organization's single largest source of revenue is membership dues. This comprises 60 percent of total revenue. The organization may want to consider plans to further diversify its revenue streams to protect against future declines that could occur from dues. You would need to look at prior year financial statements to see the full picture of the trend in dues revenue.
- Based on looking at the consolidated Statement of Activities, you can also see that finance and administration costs of $4,000,738 nearly equal the total program costs of $4,515,682. The organization is incurring an inordinate amount of overhead costs to run its operations. Further investigation needs to be performed on this anomaly.

Exercise 3B: Working with Financial Statements

Use the Society of Analysts and Affiliate consolidated financial statements in Example 3B to familiarize yourself with some of the concepts unique to nonprofit organizations.

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 consolidated Statement of Financial Position:
1. Locate the current and noncurrent portions of contributions receivable. Which footnote provides information on the components of contributions receivable? What is the net amount of contributions receivable?
  ____________________________________________
  
  ____________________________________________
2. Locate noncurrent investments. Where can you find information on the types of investments held by the organization? What is the total amount of investments?
  ____________________________________________
  
  ____________________________________________
3. What types of net assets does the organization have? What portion of net assets can be used to fund general operations?
  ____________________________________________
  
  ____________________________________________
4. What is the total amount of net assets without donor restrictions?
  ____________________________________________
  
  ____________________________________________
5. What is the current ratio (current assets/current liabilities) on December 31, 2016?
  ____________________________________________
  
  ____________________________________________
Locate the consolidated Statement of Activities:
1. What is the total change in net assets without donor restrictions?
  ____________________________________________
  
  ____________________________________________
2. What is the total change in net assets with donor restrictions?
  ____________________________________________
  
  ____________________________________________
3. What amount of donor-restricted contributions was received during the year?
  ____________________________________________
  
  ____________________________________________
4. What is the total amount of net assets released from restrictions? What does this mean?
  ____________________________________________
  
  ____________________________________________
5. Did the organization's total operating revenues exceed operating expenses before net investment return?
  ____________________________________________
  
  ____________________________________________
Looking at the consolidated Statement of Functional Expenses:
1. What is the largest natural expense incurred in the Finance and Administration supporting service category?
  ____________________________________________
  
  ____________________________________________
2. What is the second-largest natural expense category overall?
  ____________________________________________
  
  ____________________________________________
Moving to the consolidated Statement of Cash Flows:
1. What amount did the organization borrow on the line-of-credit during the year? In what section of the statement did you find this information?
  ____________________________________________
  
  ____________________________________________
2. Did cash increase or decrease from FY 2015 to FY 2016?
  ____________________________________________
  
  ____________________________________________
Focusing on the footnotes:
1. What does the organization consider a cash and cash equivalent?
  ____________________________________________
  
  ____________________________________________
2. How does the organization value its investments? Which footnotes can you get this information from?
  ____________________________________________
  
  ____________________________________________
3. What is the organization's capitalization policy for property and equipment?
  ____________________________________________
  
  ____________________________________________
4. What is the total amount of furniture and equipment the organization has? Which note contains this information?
  ____________________________________________
  
  ____________________________________________
5. Describe the Strategic Marketing and Communications program. Which note can this be found in?
  ____________________________________________
  
  ____________________________________________
Which components of the consolidated financial statements reflect the adoption of ASU 2016-14?
1. ____________________________________________
2. ____________________________________________
Among the most important issues revealed by the consolidated financial statements are the following:
1. ____________________________________________
2. ____________________________________________

Exercise 3B: Answers

Begin by looking at the independent auditor's report:
1. What type of opinion is this?
  Modified as a result of a departure from generally accepted accounting principles.
2. What period is covered by the report?
  Year ended December 31, 2016.
Locate the consolidated Statement of Financial Position:
1. Locate the current and noncurrent portions of contributions receivable. Which footnote provides information on the components of contributions receivable? What is the net amount of contributions receivable?
  Note 4; $121,692.
2. Locate noncurrent investments. Where can you find information on the types of investments held by the organization? What is the total amount of investments?
  Notes 2 and 5; $10,408,931.
3. What types of net assets does the organization have? What portion of net assets can be used to fund general operations?
  With donor restrictions and without donor restrictions; without donor restrictions.
4. What is the total amount of net assets without donor restrictions?
  $6,163,748.
5. What is the current ratio (current assets/current liabilities) on December 31, 2016?
  The current ratio is .32, which is calculated by dividing current assets by current liabilities (905,108/2,800,266) and is considered a weak current ratio.
Locate the consolidated Statement of Activities:
1. What is the total change in net assets without donor restrictions?
  $1,183,586.
2. What is the total change in net assets with donor restrictions?
  $334,635.
3. What amount of donor-restricted contributions was received during the year?
  $200,000.
4. What is the total amount of net assets released from restrictions? What does this mean?
  $184,168 (Total of $84,090 and $100,078). These funds were spent in accordance with the donors' intention, or the time restriction has elapsed.
5. Did the organization's total operating revenues exceed operating expenses before net investment return?
  Yes, by $606,878.
Looking at the consolidated Statement of Functional Expenses:
1. What is the largest natural expense incurred in the Finance and Administration supporting service category?
  Salaries and wages, at $2,443,703.
2. What is the second-largest natural expense category overall?
  Benefits and taxes, at $1,172,804.
Moving to the consolidated Statement of Cash Flows:
1. What amount did the organization borrow on the line-of-credit during the year? In what section of the statement did you find this information?
  $475,000; cash flows from financing activities.
2. Did cash increase or decrease from FY 2015 to FY 2016?
  Cash increased by $184,945.
Focusing on the footnotes:
1. What does the organization consider a cash and cash equivalent?
  All highly liquid instruments with an original maturity of three months or less that are to be used for current operations, which excludes those held as part of the organization's long-term investments per Note 2, the Summary of Accounting Policies, under the Cash and Cash Equivalents heading.
2. How does the organization value its investments? Which footnotes can you get this information from?
  At fair value; Note 2, Summary of Accounting Policies, under Investments, and Note 5.
3. What is the organization's capitalization policy for property and equipment?
  The organization capitalizes assets with an original cost of $1,000 or greater per Note 2 under the Property and Equipment heading.
4. What is the total amount of furniture and equipment that the organization has? Which note contains this information?
  $57,745; Note 6.
5. Describe the Strategic Marketing and Communications program. Which note can this be found in?
  Specific marketing and media relations tactics are used to further the organization's members' analyst services to the general public; Note 13.
Which components of the consolidated financial statements reflect the adoption of ASU 2016-14?
- Change in terminology from unrestricted net assets to net assets without donor restrictions and from temporarily restricted and permanently restricted net assets to net assets with donor restrictions.
- Liquidity and Availability disclosure in Note 2, Summary of Significant Accounting Policies (the entity had already included this before the adoption but other entities may not have).
- Functional allocation methodology for expenses is included in Note 2, Summary of Significant Accounting Policies.
- The effect of adopting ASU 2016-14 in Note 2, Summary of Significant Accounting Policies.
- The required analysis of expenses by function and nature was included as a separate basic financial statement titled, consolidated Statement of Functional Expenses.
- Note 9 was expanded to detail the nature of net assets with donor restrictions and present the components.
- Note 10 was added to detail the nature of board-designated net assets. (This note could be eliminated since the detail was shown on the face of the consolidated Statement of Financial Position, but was included here for illustrative purposes.)
- Note 11 was expanded and more detail was added related to the endowment funds to fully comply with ASU 2016-14.
- An Emphasis of a Matter paragraph was added to the independent auditor's report because of the change in presentation of underwater endowments required by ASU 2016-14 and the material effect of this change on the presentation of net assets without donor restrictions and net assets with donor restrictions.
Among the most important issues revealed by the consolidated financial statements are the following:
- There are several important insights that the consolidated financial statements provide even though they are not comparative.
- Based on a review of the consolidated Statement of Financial Position, you can note that current liabilities exceed the current assets by nearly triple. Although the organization holds mutual funds and other liquid investments in its portfolio, it would need to liquidate these assets if it needed cash for general operations. There may be losses that are realized if the assets needed to be liquidated in a down market. The organization may want to obtain professional investment advice on how to possibly structure some investments as liquid assets that may not have the potential for a loss if it needed to liquidate these quickly.
- As noted in the consolidated Statement of Financial Position, the organization also owes $475,000 on its line-of-credit. The line-of-credit is used to offset timing differences between when the cash is received and when amounts are due. The membership dues are paid based on a September 30 due date, so there are often times when cash is needed throughout the year to smooth this out. The organization is incurring interest expenses on these borrowings and should analyze this cost in comparison to the potential to restructure the investments as noted earlier to try to smooth out these fluctuations at the lowest possible cost.
- What is clear from the Statement of Activities is that the organization's single-largest source of revenue is membership dues. This comprises 60 percent of the total revenue. The organization may want to consider plans to further diversify its revenue streams to provide against future declines that could occur from dues. You would need to look at prior year financial statements to see the full picture of the trend in dues revenue.
- Based on looking at the consolidated Statement of Activities, you can also see that finance and administration costs of $4,000,738 nearly equal total program costs of $4,515,682. The organization is incurring an inordinate amount of overhead costs to run the operations. Further investigation needs to be performed on this anomaly.