Financial statements tell an important story about a nonprofit organization, but they don’t tell the whole story on their own.
A statement of financial position can show how much cash, debt, or receivables an organization has. A statement of activities can show whether revenue increased or expenses grew. But those numbers often raise another question: What’s happening behind them?
That’s where financial statement footnotes come in. Footnotes provide the context, accounting policies, restrictions, commitments, and other details that help readers understand what the numbers really mean.
For nonprofit leaders and board members, reading the financial statements, footnotes, and Form 990 together can provide a much clearer view of the organization’s financial position, risks, and overall story.
The financial statements provide the starting point.
| Statement of Financial Position | shows the organization’s assets, liabilities, and net assets at a specific point in time. |
| Statement of Activities | shows revenue, support, expenses, gains, losses, and changes in net assets over a period. |
| Statement of Functional Expenses | explains how costs are allocated among program services, management and general activities, and fundraising. |
But those statements can’t always answer the questions that follow.
For example, if pledge receivables increased significantly, when will that cash actually arrive? If net assets increased, how much of that balance is available for general operations? If debt appears manageable today, is there a large payment coming due in the future?
Those are the kinds of questions footnotes can help answer.
Footnotes are part of the financial statements, not an optional appendix. They can explain how accounting policies were applied, describe restrictions on resources, and provide more detail about risks or future obligations.
For many nonprofit organizations, several areas deserve particular attention.
Revenue recognition can be complicated for nonprofits, particularly when contributions, grants, pledges, and exchange transactions are involved.
A contribution may be unconditional and recognized when promised, even if the cash won’t arrive until later. Other arrangements may be conditional, meaning revenue isn’t recognized until certain requirements are met.
Pledge receivables also deserve a closer look. A large receivable balance doesn’t necessarily mean the organization has that cash available today. Some pledges may be collected over several years, and collectibility should also be considered.
Looking at revenue, receivables, and net assets together can help explain how much flexibility the organization really has.
Net assets with donor restrictions are another major area for nonprofit organizations.
A donor may restrict funds for a specific purpose, a future period, or both. Those restrictions affect how and when the organization can use the money.
Two organizations could report similar total net assets but have very different financial flexibility depending on how much is restricted.
That’s why leaders and board members should look beyond the total and ask how much is actually available to support operations.
The liquidity and availability footnote can be helpful because it focuses on resources available for near-term spending.
It generally starts with assets that can be converted to cash, such as receivables and investments, and then considers amounts that aren’t readily available because of donor restrictions, board designations, or other limitations.
This can give readers a better sense of whether the organization has enough resources available to cover upcoming needs.
Debt, leases, and commitments also deserve attention. A liability shown on the statement of financial position may look manageable, but the footnotes may reveal a balloon payment, future lease obligations, or other contractual commitments that will require cash later.
Understanding when those obligations come due can be just as important as knowing the balance today.
The Form 990 adds another layer to the organization’s financial story.
While the financial statements and footnotes focus heavily on financial reporting, Form 990 also communicates information about the organization’s mission, governance, compensation, policies, program services, and related entities.
Many of the financial numbers should connect back to the audited or reviewed financial statements, although some differences are expected because Form 990 follows IRS reporting rules rather than generally accepted accounting principles.
For example, certain donated services may appear in the financial statements but be removed from Form 990 reporting. Consolidated financial statements may also include multiple entities, while each legal entity files its own Form 990.
When differences exist, they should be explainable rather than mysterious.
Form 990 is also a public-facing document, which makes the narrative sections especially important.
Descriptions of program service accomplishments, governance processes, compensation procedures, and other activities should be current and accurate. Simply rolling forward the same language year after year can create problems if the organization has changed.
Ask whether the Form 990 still reflects what the organization actually does today.
Program descriptions are also an opportunity to explain accomplishments, impact, and the people or communities served. The financial statements may show what resources were used, but Form 990 helps explain what those resources supported.
A strong review process doesn’t require board members or executives to become accountants.
Start by reviewing the financial statements for large balances, unusual changes, new debt, changing cash balances, or significant receivables. Then turn to the footnotes to understand what may be driving those numbers.
Next, compare the financial information to Form 990 and review the nonfinancial sections for accuracy and consistency.
Finally, read the documents from an outsider’s perspective. If you were a donor, funder, prospective board member, or other stakeholder seeing this information for the first time, would the organization’s financial position and activities make sense?
The financial statements provide the numbers. The footnotes provide the context. Form 990 adds the public-facing story.
When all three are reviewed together, nonprofit leaders and board members can better understand the organization’s financial position, explain changes, identify risks, and communicate a more complete and consistent picture to the people who rely on that information.
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