Does anyone actually read footnotes? If they’re financial statement footnotes, the answer is usually “yes.” Footnotes can provide donors, governmental supporters and other stakeholders with critical information about your not-for-profit. So it’s important to work with your CPA to make sure your footnotes are accurate and thorough.
Operations and accounting policy snapshot
One important set of footnotes is the summary of significant accounting policies. This includes two sections. The first is a brief description of your operations (featuring your chief purpose and sources of revenue). The second is a list of the significant accounting policies that have been applied in preparing your statements.
Your summary should outline specific policies such as:
- The accounting method you used,
- Classification of cash equivalents,
- Fixed asset capitalization levels,
- Depreciation methods,
- Uncertain tax positions,
- Recognition of contributions and grants as revenue, and
- Recognition of in-kind contributions.
Footnotes are also used to disclose information related to investments. This includes the types of investments held, the carrying amounts for each major type of investment you own and the current year income.
You also must disclose any related-party transactions such as those between board members, senior management and major donors. Include the nature of the relationships between the parties, the dollar amount of the transactions and any amounts owed to or from the related parties as of the date of the financial statements.
Note existing contingencies
Your footnotes should further cover any reasonably possible loss contingencies. Contingencies are existing conditions that could create an obligation in the future and that arise from past transactions or events. Disclose the nature of a contingency and provide an estimate of the loss (or state that an estimate can’t be made).
Contingencies might include:
- Pending or threatened lawsuits,
- Claims against your organization,
- Costs already incurred where reimbursement could be disallowed under a government grant, or
- IRS examinations related to tax-exempt status, unrelated business income and excise taxes.
Be sure to disclose any time that your organization hasn’t used funds in compliance with donor restrictions.
Your statements’ footnotes should also disclose information that allows users to compare the total amount of fundraising costs with related proceeds. If a ratio of fundraising expenses to funds raised is disclosed, you should cite the method used to calculate it.
As you can see, most financial statement footnotes contain technical information best prepared by an accounting professional.
We highly recommend you confer with your Miller Kaplan advisor to understand your specific situation and how this may impact you.