Nonprofit Accounting Basics

Common Disclosures

Some of the most common disclosures are:

  • SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
    • This note contains two basic sections (1) a brief description of the organization, including the main purpose and sources of revenue; and (2) a listing of the main accounting policies in place.  These typically include:
      • Accounting method utilized in the financial statements - accrual, modified cash basis or cash basis
      • What is classified as cash equivalents
      • How the fair value of investments was determined
      • What items are capitalized as fixed assets and the number of years they are being depreciated over.
      • The income tax status of the organization
      • How contributions and grants are recognized as revenue
      • How in-kind contributions are recognized and what goods or services were provided
      • The fact that all financial statements include estimates
      • The fact that expenses are presented on a functional basis and that this involves the allocation of expenses to the various functions.
  • INVESTMENTS
    • This disclosure shows what type of investment the funds are held in - i.e. - US Government obligations, mutual funds, common stock, corporate obligations...
    • This footnote should also include a breakdown of the investment income between interest / dividend income, realized gains and unrealized holding gains
  • FIXED ASSETS
    • This disclosure shows the fixed assets by type - furniture, equipment, computers, leasehold improvements
    • It also shows the total accumulated depreciation and the current year's depreciation expense
  • NOTES PAYABLE
    • List the details (original loan amount, monthly payment, interest rate and maturity date) of any notes payable held at year-end
    • Must include a schedule of the annual principal payments due for each of the next 5 years and the total amount thereafter
    • The footnote should indicate any notes that were provided by related parties
  • LEASES
    • This note should describe any leasing arrangements and should list operating leases separately from capital leases
    • List the details (lease term and monthly payment) of all leases at year-end
    • Must include a schedule of the annual rental payments due for each of the next 5 years and the total amount thereafter
    • The footnote should indicate any leases that are with related parties
    • The note should also include the same information for any subleases (where you are receiving rental payments)
    • The amount of rent expense, or rental income, recognized during the current year
  • RELATED PARTIES
    • This is a critical footnote and should be written carefully and thoughtfully
    • This note must describe the transactions entered into with related parties (board members, senior management, significant funders...)
    • The disclosures should include a description of the transactions (leases, contributions, payments...) the dollar amount of the transactions and any amounts owed to or from the related party at year-end
  • CONTINGENCIES
    • This note details any possible loss contingencies for the entity.  The most common contingencies are potential litigation and the fact that the entity is subject to audit by government agencies.
    • Certain contingencies are required to be disclosed even though they may not be accrued for in the financial statements. 
    • For example, if your organization received government funding there is always the possibility that the government agency will perform an audit and determine that certain costs are disallowable.  While this possibility does not require you to record a liability for potential disallowed costs, most auditors will recommend that you disclose the possibility in the footnotes to your financial statements.
  •  RETIREMENT PLANS
    • This note details any retirement plans (401k, SEP, 403b...) that the entity sponsors or participates in.
    • The disclosure should include who is eligible to participate and the cost incurred (contributions to the plan) by the entity during the year.
    • If you sponsor a defined benefit retirement plan there are significantly more disclosures that need to be included in the footnotes.  If you have this type of plan you should review SFAS132R to determine the required disclosures.
  •  TEMP RESTRICTED / RELEASES
    • This note, sometimes slit into 2 separate notes, shows the temporarily restrict net asset remaining at year-end and the net assets released during the year.
    • The note should list the balances by restricted purpose (or time restriction) not by funding source.
  • PLEDGES / CONTRIBUTIONS
    • This note shows the period in which the pledges/contribution receivable will be collected.
    • You are required to list the amounts that are to be collected in:
      • Less than one year
      • One to Five years
      • More than five years
    • Disclosure should also include the amount of any allowance for uncollectible amounts and any present value discount applied to long-term receivables
    • The total amount of any conditional pledges, which are not recognized in the financial statements, should also be disclosed
  •  JOINT COSTS
    • Joint costs are costs that can be allocated to both fundraising and program services.  The guidance for determining which costs are eligible for this allocation can be found in SOP 98-2.
    • The following items are required to be disclosed when you have joint costs
      • The types of activities that resulted in joint costs
      • The total joint costs allocated and the amount allocated to each functional category
      • The methodology used to allocate the costs

NOTE:

This listing does not represent all the disclosure that may be required in your financial statements.  We recommend that prior to preparing the financial statements you review the AICPA's Guide to Audits of Not-for-Profit Organizations.  This publication will assist you in determining the required disclosures for your financial statements.