BDO USA has released the third edition of its guide to nonprofit financial reporting, updated to include the recent changes by the Financial Accounting Standards Board.
The book, “How to Read Nonprofit Financial Statements: A Practical Guide, 3rd Edition,” is designed to be a one-stop guide to understanding nonprofit statements and FASB’s new standard. The latest edition is aimed at a wider audience than the original versions.
“Previously it had been geared more toward trade associations,” said one of the co-authors, Lee Klumpp, director in BDO’s Institute for Nonprofit Excellence. “We took it and geared it towards nonprofit organizations as a whole, charities as well as trade associations. It’s really written for the nonfinancial person and the board member more than a CFO or accountant, although we hope they could glean some stuff out of it as well.”
FASB issued its long-awaited accounting standards update for nonprofit financial reporting last August, changing the ways nonprofits classify their net assets and provide information about their performance, cash flow and liquidity (see FASB releases not-for-profit accounting standard). Besides updating the book for the new standard and expanding the focus, Klumpp and his co-authors—Andrew Lang of LangCPA Consulting, and William Eisig and Tammy Ricciardella of BDO—added several chapters to the new edition about measuring performance at nonprofits.
“There’s been a lot of discussion over the last couple of years about what reserves should be, should we have reserves, and are we allowed to accumulate wealth or earnings,” said Klumpp. “What are some of the tools that we should use to measure our performance? There’s been a lot of discussion in the industry over the past couple of years, so we added chapters about that. A lot of times, you’ll have someone come in and say, ‘Well, let’s do some ratio analysis. What ratios are really helpful for nonprofits?’ We try to gear it a little bit towards that. Hopefully people will find that piece of it useful because we’ve started a discussion with the new standard on liquidity. If we’re going to manage liquidity, how are we going to manage that? You can do that through benchmarking, KPIs, ratio analysis and establishing a reserve. That can all be part of your policy. We try to not only provide information, but we try to provide some solutions for people to consider too.”
The book provides guidance on how to read financial statements for nonprofits and make sense of the information in comparison to other nonprofits.
“Let’s say you develop your own ratio, benchmarks or KPIs that you’re going to use,” said Klumpp. “You could then get your competitors or other nonprofits that you hold in high esteem and from the face of their statements calculate their ratios and benchmarks, and report out to your board or your management team about how you’re doing compared to others that you either compete against or hold in high regard, or whatever it might be. The other side of the book is set up to be a practical guide. We actually have copies of financial statements in there for different types of organizations under the current guidance, as well as the new guidance, because not everyone is changing today. Then we actually have some exercises, like asking questions about: what is the liquidity ratio of this particular organization, or what are some of the things that are unique to this particular set of financial statements? We’re trying to make it a really easy learning tool for people to use in order to understand a little bit better how not-for-profit financial statements work.”
BDO might also offer webinars on some of the material in the book in the future. “Maybe somebody can’t sit down and read the whole 240 pages of the book, but we may have some webinars out there that we might offer in addition,” said Klumpp. “We’re hoping this will be something people use when they’re reviewing financial statements to better guide their organizations.”
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