Use ASU 2016-14, Form 990, and Other Tools to Enlighten Nonprofit Donors
Many charitable organizations struggle to answer the question: What are our donors really looking for? This often turns into a lengthy discussion about where to spend time and energy. Do we plan a splashy donor event? Redesign the annual report and website?
Rarely does the dialogue include financial statements, IRS Form 990, or nonprofit rating websites like Charity Navigator. But maybe it should. These familiar management and reporting tools can speak directly to your donors and market your organization’s mission to a wider audience.
Financial statements can tell your story
While financial statements have historically been considered a management tool used by lenders to make decisions, a savvy organization uses them to tell its story.
Download our webinar recording and nonprofit financial reporting checklist.
Presenting Nonprofit Financial Statements Under ASU 2016-14
The current minimum requirements under U.S. generally accepted accounting principles (GAAP) fail to inform donors of their organization’s mission and financial status. This is the main reason the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-14, Presentation of Financial Statements of Not-for-Profit Entities.
Here are some practical tips to help you tell your nonprofit’s story as you implement ASU 2016-14.
Differentiate yourself in footnotes
As you implement ASU 2016-14 (effective for fiscal years beginning after December 15, 2017), consider how you can make your financial statements speak directly to donors. First of all, footnotes to your financial statement should not be rolled forward from previous years. The first footnote requires a description of the principal activity of the organization. This is where you can and should differentiate your organization from others. Use it to present your mission and show how your charity affects change. Provide donors with your accomplishments over the past year to demonstrate your commitment to the mission.
Include MD&A in your financial statements
You may be thinking, “My nonprofit doesn’t make its financial statements available to the public, so why should I care?”
You should care because Charity Navigator and other nonprofit rating websites care. The Charity Navigator site includes the availability of financial statements in its rating methodology. Many charitable organizations don’t want to make their financial statements available to the public because they’re afraid of what donors might think. They may fear that if they are too financially stable, donors will contribute less due to a perceived lack of need. On the other hand, they may fear being seen as too financially unstable, resulting in a lack of trust that donations will make it to the right place.
You can calm those fears by including a management discussion and analysis (MD&A) in your financials. Public companies and governmental entities are required to provide an MD&A with their financial statements, but nonprofits are not. That doesn’t mean you can’t. Your independent auditor doesn’t audit the MD&A, which should represent the thoughts and opinions of management and provide a forecast of future operations. This is an excellent opportunity to speak directly to your donors.
Spotlight your mission and accomplishments on IRS Form 990
IRS Form 990 is just an informational return for the IRS, right? Actually, it is a publicly available document that provides your organization with a great opportunity to tell your donors what you’re all about.
The form requires disclosure of your mission in Part I, program service accomplishments in Part III, governance policies and procedures in Part VI, and comparative financial information. Many organizations and accounting firms simply roll this information forward from previous years. If you’re doing this, you’re missing out on a chance to show donors your goals and accomplishments, and your commitment to good governance and transparency.
Most important, Form 990 is a primary source of information used by Charity Navigator.
Review and improve your Charity Navigator metrics
Charity Navigator is the most utilized evaluator of charities in the United States, with 11 million visits to its website during 2017. The site rates U.S.-based 501(c)(3) public charities that have met the following criteria:
- Filed Form 990 for seven consecutive years
- Generated at least $1 million in revenue for two consecutive years (of which $500,000 and 40 percent is from public support)
- Allocated at least 1 percent of expenses to fundraising and 1 percent to administration for three consecutive years
Once an organization meets these criteria, it is rated on a scale of one to four stars based on seven financial health metrics and 17 accountability and transparency (A&T) measures.
Donors go to Charity Navigator looking for three- and four-star ratings. These above-average numbers show that a nonprofit is efficiently using donor funds; has programs that are well-established; and has a high level of commitment to good governance, best practices, and openness of information. The rating process is complex, but in simple terms, donors want to see high financial health and A&T scores. Foundations are also using Charity Navigator to evaluate charities that have applied for funding.
Increasing your financial health score is a bit like improving your credit score: It can be slow and difficult, but it’s not impossible. Reviewing the functional allocation of expense methodology is a good place to start, as five of the seven metrics relate to expenses. If you’re able to increase program expenses while holding fundraising and administrative expenses flat, the financial health score will climb.
A challenge for you
Here’s a challenge for you and your independent accountants: As you implement ASU 2016-14 this year, take the opportunity to change your mindset about financial statements and mandatory IRS filings. Don’t just meet the minimum requirements. Even if potential donors aren’t seeking this information from you directly, they’re most likely using Charity Navigator as a major influence on their decisions. Our nonprofit professionals can help you make the most of your information, so you can create opportunities for those you serve.