By Brian Windley, CPA, Partner and Shawn Middleton, CPA, Supervisor
As Published in the Washington Business Journal
Organizations of all kinds rely on financial reports to communicate the state of the organization to their board members and stakeholders. Primarily numerical, annual audits don’t always tell the whole story.
Inspired by the measures publicly traded companies and governmental entities have taken to improve reporting, the Financial Accounting Standards Board’s (FASB) Not-For-Profit Advisory Committee (NAC) recently made a recommendation to provide guidance to not-for-profits, helping to bring structure to the explanation of their financial situation and provide important information to interested parties, including donors. In annual audit reports, publicly traded companies include a “Management Discussion and Analysis” section that provides commentary and analysis about the organizations’ financial health and operations.
Adding this component can make a big difference to supporters. Potential donors – both corporate and individual – are called upon by many not-for-profits for financial contributions. When determining which organizations to donate to, many donors want to see that their contribution is primarily used to further the mission of the organization.
While not mandated, the Management & Discussion Analysis section makes it easier for donors and stakeholders to understand what is happening within the organization, and to see the connection between the organization’s impact on the community and their financial statements.
Management and Discussion Analysis Commentary
Below are some of the most important areas this section could address.
Mission Statement/Organizational Objectives.
A clearly defined organizational purpose as well as information on campaigns/programs and related objectives help to provide a broad overview of the organization.
Verified Effectiveness and Improvements.
The number of individuals/organizations served is often included as well as specific advocacy- and awareness-raising activities. This section demonstrates the ways the effectiveness of the organization has been improved and can be further illustrated through testimonials.
Highlights of the Past Year.
Two types of highlights can be addressed:
Financial:
While numbers may show that the organization is in the red or in the black, only words will explain why. Factors affecting the finances, such as one-time donations or significant changes in funding, can help add clarity to changes in the financials.
Non-Financial:
For an accurate picture of the organization’s state of affairs, a comprehensive list of all the organization’s achievements and difficulties over the past year may be detailed.
Use of Funds.
Donors may want to understand precisely how dollars are used. Details such as the percentage spent on overhead expenses and how much is directly allocated to providing services is often broken down.
Accounting Developments.
Current and future changes in accounting regulations may affect the way financial statements appear. A brief, non-technical summary of changes that will pose difficulties for an organization may include:
- The method of presenting endowments and fair value disclosures
- Mergers and acquisitions of not-for-profit organizations
- Potential changes in lease accounting
Major Capital Projects and Strategic Plans.
Understanding the longer term vision of the organization is critical in understanding the importance capital projects play in poising the organization to meet its long-range strategic plan.
Budget Highlights.
Significant items or variances in the organization’s budget are important factors to consider when putting the financials into perspective. Often any debt the organization may reduce or incur is detailed in this section.
Potential Effects of Demands, Risks, Uncertainties, Events, Conditions and Trends.
Forward-looking information about both current and anticipated risks can be of particular interest to donors as well as understanding outside factors affecting the successful execution of the organization’s mission.
Comparisons with Similar Organizations and Industry Benchmarks.
Thanks to the Internet, public information about specific not-for-profits is readily available, making it easier than ever for organizations to compare their successes to those of peer organizations.
Taking the Next Step
A Management Discussion and Analysis section in an annual audit report will improve transparency to donors and provide a more accurate picture of the organization’s financial health. The recommendation to provide guidance on developing such a section may indicate that we will see more MD&A sections in not-for-profit organizations’ financial statements in the coming years.
Brian Windley, CPA, is a partner and provides technical oversight of the firm’s Not-For-Profit Team at PBMares, LLP a regional accounting and consulting firm serving clients throughout the Mid-Atlantic. Co-author Shawn Middleton, CPA, is a supervisor and is an active member of the firm’s Not-For-Profit Team. For more information, please contact the author at bwindley@pbmares.com.