What do users (including board members) need from NFP financial statements?

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What do users (including board members) need from NFP financial

A down
earth list from

Mautz, R. K. (1994).

Financial Reporting for Nonprofit Organizations: A Fresh Look
New York, NY: Garland Publishing, Inc.
(page 13)

How much did
they get this year and from what sources?

What did they do with it?

How much do they have left?

What are the plans for next year? How much more will they want and how do they

expect to get it?

Premises about users and their needs


Anthony, R. N. (
Tell It Like It Was: A Conceptual Framework for Financial Accounting
Homewood, IL: Richard D. Irwin, Inc. (
p. xiii

Users of financial statements have a reasonable understanding of accounting principles and of the
nature of the entity being

reported on and are willing to devote a reasonable amount to time to
studying the information.

Users need accounting information about economic activities and status of an entity, but the type of
information they need is not precisely known.

Users need in
formation about the past performance and financial condition of an entity, because
information about the past helps users predict the future of the entity and appraise the performance of
its managers.


Users do not expect financial statements, per se, to fo
recast the future.

Users are primarily interested in the performance of an entity and secondarily to its status.


Between competing accounting practices, one that provides users with more useful
information about performance is preferable to the one that
provides more useful information
about status.

Users believe that income provides a better measure of an entity’s performance than does cash flow.

Users need information that helps them make judgments about an entity’s ability to meet its



users need information on the order of priority of each major class of obligations and
the amounts of the obligations of that class.

Users need information that is measured fairly.

Users need timely information.

Users need reliable information.

Users need

comparable information.

Users do not want accounting standards to be changed unless there is a strong reason to do so.



Teresa P. Gordon and Saleha B. Khumawala, “The Demand for Nonprofit Financial Statements: A
l of Individual Giving,”
Journal of Accounting Literature
, Vol. 18, 1999, pp. 31


The demand for financial reporting

as frequency and depth of contacts between
the donor and the ultimate beneficiaries of the gift


The deman
d for financial reporting

as the donor’s direct involvement with
recipient organizations

Corollary 2a:

When the donor is an active member of an organization (volunteer,
member of the congregation, self
help group, etc.), the demand for

reporting decreases.

Corollary 2b.

When gifts are primarily motivated by the desire to repay institutions from
which the donor or those close to the donor have previously received benefits, the
demand for financial reporting decreases.


As the tangible and intangible rewards of giving
, donors’ demand for financial

Corollary 3a: As the proportion of the contribution which represents mutual
benefit and
benefit decreases, donors’ demand for financial repor
ting increases.

Corollary 3b: When the social exchange has characteristics of an
, the donor is
less likely to demand and/or use financial information.

Corollary 3c: Donors whose religious convictions advocate prudent giving are more
likely to
demand and/or use financial information.


Financial reporting is relatively more important for comparing organizations that are
directly competing for the donor’s gift than for comparing organizations with distinctly
different missions and objectives.


The demand for financial reporting increases with the size and frequency of donations.

“New questions” from
a critic of functional expense

Pallotta, Dan. 2008.
Uncharitable: How Restraints on Nonprofits Undermine Their Potential
. Medford
Tufts University Press. List from pages 170

This is a direct quote (but I might have added typos):


How effective are the charity’s programs and how is efficacy being measured?


What is the quality of the organization’s program staff?


How do the organi
zation’s clients rate its efforts?


What is the scale of the achievement, and are the comparisons being made with achievements of
equal scale?



What is the incremental effect of a donation in the present moment?


How new is the charity?


How well known is the
cause to the public, and does the charity face greater difficulty than its
peers in raising funds?


How have economic conditions affected the charity?


Are comparisons being made between charities that account for program expenses in an identical



intangible benefits being accounted for?


Is the future value being accounted for?


Is the value of the outcomes being accounted for?


Is the organization attempting any bold initiatives that might affe3ct the dollars going to


What is the
organization’s long
term vision and what is it doing to achieve it?


How is the long
term investment affecting the short
term financial picture?


Does the organization have adequate infrastructure?

Comment: Most of these questions are not purely financial bu
t if we were to do away with functional
reporting, what would take its place as a measurement of efficiency? What other information could
help a donor assess whether the charity was making appropriate use of its scare resources?

T Gordon

FASB Concept S
tatement No. 4

[Excerpts from] HIGHLIGHTS

for use of NAC only


by T Gordon


have been added)

This Statement focuses on organizations that have predominantly nonbusiness

characteristics that
heavily influence the operations of the organization.

major distinguishing characteristics

of nonbusiness organizations include: (a) receipts of
significant amounts of resources from resource providers who do not expect to receiv
e either
repayment or economic benefits proportionate to resources provided, (b) operating purposes that
are primarily other than to provide goods or services at a profit or profit equivalent, and (c)
absence of defined ownership interests that can be sold
, transferred, or redeemed, or that convey
entitlement to a share of a residual distribution of resources in the event of liquidation of the

{Should there be other distinguishing characteristics to drive any variations in
appropriate reporti

These characteristics result in certain
types of transactions that are infrequent in business

enterprises, such as contributions and grants, and in the absence of transactions with owners.

The line between nonbusiness organizations and business enterp
rises is not always sharp since
the incidence and relative importance of those characteristics in any organization are different.
This suggests that, for purposes of developing financial reporting objectives,
a spectrum of
organizations exists
ranging from

those with clearly dominant nonbusiness characteristics to
those with wholly business characteristics.

Examples of organizations that clearly fall
outside the focus

of this Statement include all
owned enterprises and other types of organizations,

such as mutual insurance companies
and other mutual cooperative entities that provide dividends, lower costs, or other economic
benefits directly and proportionately to their owners, members, or participants.


Examples of organizations that clearly fall
thin the focus

of this Statement include most
human service organizations, churches, foundations, and some other organizations, such as those
private nonprofit hospitals and nonprofit schools that receive a significant portion of their
financial resources
from sources other than the sale of goods and services.

Borderline cases may exist

where organizations possess some of the distinguishing
characteristics but not others. Examples are those private nonprofit hospitals and nonprofit
schools that may receive
relatively small amounts of contributions and grants but finance their
capital needs largely from the proceeds of debt issues and their operating needs largely from
service charges. As a result, the objectives of Concepts Statement 1 may be more appropriat
e for
those organizations.

The objectives in this Statement stem from the common interests of those who provide resources
to nonbusiness organizations in the services those organizations provide and their continuing
ability to provide services.

s organizations generally have no
single indicator of performance comparable to a
business enterprise’s profit
. Thus, other indicators of performance usually are needed.

The performance of nonbusiness organizations generally is
not subject to the test of d
in markets to the extent that business enterprises are.

{However, there is a lot of
competition for scare donor provided resources! So there are other types of competition that
could drive financial reporting needs}

Other kinds of controls introduced to compensate for the lesser influence of markets are a major
characteristic of their operations and affect the objectives of their financial reporting. Controls,
such as formal budgets and donor restrictions on the use o
f resources, give
managers a special
responsibility to ensure compliance
. Information about departures from those mandates is
important in assessing how well managers have discharged their stewardship responsibilities.

The objectives in this Statement appl
y to general purpose external financial reporting by
nonbusiness organizations.

The objectives stem
primarily from the needs of external users

who generally cannot prescribe
the information they want from an organization.

{need to add board members????}


addition to information provided by general purpose external financial reporting, managers
and, to some extent, governing bodies need a great deal of internal accounting information to
carry out their responsibilities in planning and controlling activitie
s. That information and
information directed at meeting the specialized needs of users having the power to obtain the
information they need are beyond the scope of this Statement.

The objectives of financial reporting are affected by the economic, legal, p
olitical, and
social environment in which financial reporting takes place.

The operating environments of nonbusiness organizations and business enterprises are similar in
many ways. Both nonbusiness organizations and business enterprises produce and distri
goods and services and use scarce resources in doing so.

Differences between nonbusiness organizations and business enterprises arise
in the ways they
obtain resources
. Noneconomic reasons are commonly factors in decisions to provide resources
to part
icular nonbusiness organizations.


The objectives also are affected by the characteristics and limitations of the kind of information
that financial reporting can provide.

The information provided by financial reporting is primarily financial in nature: It
is generally
quantified and expressed in units of money. However,
quantified information expressed in
terms other than units of money and nonquantified information may be needed to
understand the significance of information expressed in units of money or t
o help in
assessing the performance of a nonbusiness organization

The information provided by financial reporting pertains to individual reporting entities, often
results from approximate rather than exact measures, largely reflects the effects of transac
and events that have already happened, is but one source of information needed by those who
make decisions about nonbusiness organizations, and is provided and used at a cost.

The objectives state that:

Financial reporting by nonbusiness organization
s should provide information that is
useful to present
and potential resource providers and other users

in making rational decisions about the allocation
of resources to those organizations.

Financial reporting should provide information to help present and potential resource providers and
other users in
assessing the services

that a nonbusiness organization provides and its
ability to
continue to provide those services

Financial reporting sh
ould provide information that is useful to present and potential resource
providers and other users in assessing how managers of a nonbusiness organization have discharged
stewardship responsibilities and about other aspects of their performance.

ancial reporting should provide information about the
economic resources, obligations, and net
resources of an organization,

and the effects of transactions, events, and circumstances that change
resources and interests in those resources.

Financial report
ing should provide information about
the performance of an organization during a
d. Periodic measurement of the changes in the amount and nature of the net resources of a
nonbusiness organization and information about the service efforts and accomplis
hments of an
organization together represent the information most useful in assessing its performance.

Financial reporting should provide information about
how an organization obtains and spends cash

or other liquid resources, about its borrowing and repay
ment of borrowing, and about other factors
that may affect an organization’s liquidity.

Financial reporting should include
explanations and interpretations

to help users understand
financial information provided.


The theoretical model for giving that
applies to NFPs is the “mediated philanthropy
” model. The problem
is that donors may have little or no direct contact with the beneficiaries of their gifts. This drives one of
the reasons we need financial reporting.

If the donor is in direct contact wit
h beneficiaries, they can make
their own evaluation of the success of the mission
related activities. It is the disconnect between donors
and beneficiaries that drives the need for “service efforts and accomplishments” reporting.

The chart on the next pa
ge provides an exhaustive list of the types of transactions that might occur
between resource providers and NFP entities. (Exhibit 2)

while I created the list, it is a compilation of
ideas from various other published papers

as described in the full ve
rsion of the JAL paper.


chart might provide some “principles
based” guidance for types of reporting needed
depending on the nature of the interactions between donors and NFPs. (Exhibit 1)
. Again, I must have
gotten all the “terms” from one pa
per or another but my own paper did not describe what “adoptive
philanthropy” means.

Figure 2 is the “full model” that supports the “propositions” listed earlier. As others in the NAC have
mentioned, it is unlikely that one compares financial statements of

a church versus an art museum before
deciding which one receives a donation! The decision to give is driven by a multitude of factors and
many of them are entirely divorced from any desire to be a “wise” or “careful” giver. As yet there is no
sound resea
rch on which to base the question as to the percentage of donors who would use financial
information (in any
form including 990s, annual reports, ratings by a watchdog group, etc. Most
researchers expect that the percentage is LOW.

But maybe that is dri
ven by the fact that financial
statements are not “friendly” or do not provide the information that donors would really like to know.


Exhibit 2

Types of Transfers

Comparative Status of Parties

Source of reciprocity

Economic exchanges

Not relevant

way exchange of equal
value is negotiated by parties.
No future reward is necessary to
motivate the exchange


Higher status party makes
unilateral transfer to lower status

Reciprocity is not expected
although patron may anticipate
general societal or cultural


Lower status party makes
unilateral transfer to higher
status party

Reciprocity is not a given
although giver may hope to
avoid adverse future

Gift exchanges

Transfers between parties of
equal st

Closed system of reciprocity: a
return “gift” is expected in some
form from the recipient


Transfers between parties of
equal or unequal status

Trilateral or serial reciprocity: a
person who receives a gift is
expected to later make gifts

others, not necessarily to the
original donor


Gifts to divine beings or exalted
humans in the form of transfers
to those who are unable to

A very long chain of serial
reciprocity where the most
exalted being returns something

the original giver

Autistic exchanges

Unilateral transfer to another

Giver expects no reciprocity
through actions of recipient or
any third party. Any “reward” is
purely internal to the giver.

From Gordon & Khumawala (1999)

derives from various sources as stated in that paper


Exhibit 1

Modes of Interaction between Donors and Recipients

side Strategies

Level of contact, involvement
and communication between
recipients and donors

Kinds of specific knowledge
donors have about recipients

Relative priority given to
recipient needs versus donor


Consumption Philanthropy

Adoptive Phi

Therapeutic or empowering


High level of contact and
involvement between donors
and recipients often between
donors and beneficiaries

Donors have direct knowledge
about recipients and

Donors focus on recipient

and often seek to know
and be known by the
beneficiaries of their support.


Contributory Philanthropy

Brokering Philanthropy

Catalytic Philanthropy

Low to high level of
involvement between donors
and recipient organizations but
or no direct involvement
between donors and

Donors may have direct
knowledge about recipient
organizations but little direct
knowledge about beneficiaries.

Donors focus on discerning
how much and to what they
should contribute and on
others to contribute too.
There may be a high level of
devotion to needs of


Exchange Philanthropy

Derivative Philanthropy

Noblesse oblige Philanthropy

May have little or no
involvement or contact with
recipient organizations


Donors may have little direct
knowledge about recipient
organizations and beneficiaries.

Donors focus on expectations
of their peers rather than needs
of beneficiaries

From Gordon & Khumawala (1999)


From Gordon & Khumawala


In scanning the environment, I came across multiple sets of what board members “ought”
to want to know and a few other interesting tidbits cited below.


The “2010 Charity Event Market Research Report,” featured in the
Chronicle of Philanthropy
includes the feedback of 850 respondents who regularly attend charity events in 30 states.

Some helpful insights from the report are:

Celebrity appearances are less effective than you think,

especially if the celebrity is
not on the ‘A’ or ‘B’ list.

Ticket prices should be set based on the demographics of leading attendees; the event’s
goals; and the kind of food, beverages and entertai
nment that will be offered

better to ask for more than less

Almost half (46.9%) of
goers want 75% of ticket proceeds to go towards the
actual cause of your nonprofit organization.

Another 32.8% would be willing to accept
50% of proceeds donated to your charity.

Keep program speeches brief
and find
creative and compelling ways to
demonstrate the organization’s mission and results
at the event


New Mexico

responsibilities of not
profit board members


Board members are responsible for assuring the finan
cial accountability of the
charity. Procedures need to be established to keep the organization fiscally
sound and ensure that it operates in a fiscally responsible manner. Care must be
taken to
use any restricted funds properly
. Trustees need to oversee th
executive director and determine that the charity's purposes are
without waste
. Preparation of a budget is important to provide clear directions
for spending and translating program and management goals of the board into
financial projections.

The organization needs to be able to demonstrate the wise use of its

Accurate records of all income, expenditures, transactions and activities
must be maintained. Accurate minutes of board meetings should be taken in
order to demonstrate board appr
oval of certain expenditures and investments
and to show that informed decisions were made with regard to these
transactions. The following are specific actions that board members should take
to ensure that their duty to manage accounts is being fulfilled:


Keep accurate records of income, investments, expenditures and
transactions, and accurate minutes of board meetings;


Develop annual budgets that provide clear direction for spending at all
levels of activities. The budget should be a blueprint of the boa
program plans;


Establish appropriate internal accounting systems, including a system of
checks and balances. No one person should retain total control over


Prudently invest and reinvest assets;


Assist the organization in acquiring resourc
es for its programs. Develop
fundraising goals and policies. Make certain that fundraising appeals are
presented honestly and fairly, and monitor the performance of fundraising
professionals; and



Shop around for the best values in goods and services throu
comparisons and informed bidding processes. This process should also be
applied to contracts entered into with fundraising professionals.

The MA Attorney General’s Guide for Board Members of a Charitable


As a board member you have primary responsibility for making sure that the charity is
financially accountable, that it is not allowing charitable assets to be used inappropriately or
diverted to private interests, that it has mechanisms in place

to keep it fiscally sound, and that it
is properly using any restricted funds it may have.


• The board should make sure that a realistic annual budget is developed.

• The budget should be developed early enough that the entire board can be inv
olved in its
review and approval before the beginning of the fiscal year.

• The board should be sure that the charity has adequate internal accounting systems and
controls. At a minimum, the board should discuss and approve all delegations of its signatory

authority, put these delegations in writing, and review them annually. In addition, the board
should consider requiring board action on large or especially significant contracts or grants, and
on all transactions involving real estate, borrowing, or sale/
disposal of large assets. Board
members should expect management to produce timely and accurate income and expense
statements, balance sheets, and budget status reports, and should expect to receive these in
advance of board meetings. These reports ought t
o be easily understood by the majority of board
members and board members should take an active role in reviewing and questioning the
information in them.

• The board should require periodic confirmation from management that all required filings (such
as t
ax returns and the Massachusetts Form PC) are up
todate and that employee withholding
taxes and insurance premiums are being paid when due.

• The board should consider the value of having independent audits and maintaining standing
audit and finance commit
tees. However, if these committees are established, the full board
should still receive and act on the report of the independent auditor, receive periodic financial
reports, and approve the budget.

• The board should make sure that fundraising is done hone
stly and with integrity. The board
also should make sure that any contract with an outside professional fundraiser is fair and
reasonable, and that the fundraiser’s performance is monitored.

The board should confirm that any restricted gift to the charit
y is separately accounted for, and
that the funds are being used in accordance with the terms of the restriction


The board should be informed about all aspects of the
organization’s finances and is ultimately responsible for the financial health

integrity of the organization.