In spring of 2023, the Commission released an updated version of the Requirements Manual and a document outlining the changes. Each month we will highlight a change, why we made it and why it is important. This month we are looking at an UPDATED finance requirement.
Why is it important?
- Detailed financial reports help board members meet their fiduciary obligations. Reports allow a board to track the land trust's current performance against the budget and help it understand if a portion of the revenue for the reporting period is not available to cover general operating expenses because it is restricted for land or easement acquisitions or for other purposes. A board can then determine if the land trust is raising enough money to cover operating expenses.
What Changed?
- The requirement related to the balance sheet (or statement of financial position) in part (a) was clarified with a definition of net assets. [See Fig.1]
- The requirement related to the budget-to-actual report in part (b) was clarified to be consistent with accounting standards that the financial statements should not co-mingle restricted revenue and other non-operating revenue with unrestricted (operating) revenue. [See Fig.2]
- Separating restricted funds on the financial reports does not mean that separate financial accounts are required for restricted money versus those without donor restrictions. Rather, land trusts must track receipt and use of donor restricted assets separately and report them accordingly.
Why the Change?
- Since the related requirements were first published in 2018, a number of land trusts have needed to take action to improve the contents of the financial reports presented to the board. The changes in the 2023 Manual are intended to make the requirements clearer so land trusts can better meet the requirements and accounting standards.
- The current application includes the documents needed to demonstrate compliance; no new documents in the application wil be requested.
What did land trusts say?
- Most respondents supported this change but noted that not all land trusts, especially smaller organizations, receive and/or release restricted grants/gifts. With the phrase "if any," the requirement signals that this information is needed when restricted grants/gifts are received and released from restriction.
- Three-fourths of the respondents noted that the requirement change would not necessitate that they change their current reports.
Financial Reports for the Board FAQs
Here are answers to questions that the Commission has been hearing from land trusts. While it is not accounting advice, the answers give insight into what accreditation reviewers look for when considering your application.
A: Reports should allow the board to easily see what the total net assets are and what portion is actually available. You can show rolled-up information, it does not have to contain the name or purpose of each fund.
A: No, separate bank accounts are not required for restricted money vs. those without restrictions. Rather, land trusts must have an accounting system that tracks when donor-restricted funds have been received and when the funds have been released from restriction so that it can report on them accordingly.
A: The reports only need show what happens during the specific reporting period. By using the phrase "if any," the requirement signals that this information is needed when restricted grants/gifts are received and released from restriction.
A: These reports provide different information to the board and are an important part of the board providing oversight of the land trust's finances. The balance sheet shows how your land trust is doing overall – your assets, what you owe and importantly, what portion of your net assets is reserved for other purposes (by being board designated or donor restricted). The budget comparison report shows how your organization is doing as it relates to revenue and expenses so the board can anticipate if there will be a deficit and how well the land trust is performing against the budget that was set at the beginning of the fiscal year.
A: The requirement is that the reports be given periodically; so, it is not enough to only give the reports once a year as part of your annual external financial evaluation. Most land trusts provide both reports to board members before each meeting, others may provide the information on net assets (usually a balance sheet or statement of financial position) less often. Whatever way your land trust presents the information, it is important for your board to have financial information throughout the year so it can make sound financial decisions.
A: Yes, you should show released endowment funds as income coming into your organization. Even though it's budgeted, you want your report to reflect that it is part of your operating revenue.
A: Your entire board has fiduciary responsibility and should be given the reports on a periodic basis. A finance committee might review the reports in advance of the full board or more frequently than the full board, but review by only the finance committee is not sufficient to meet the requirement.
A: The accreditation process allows for an opportunity for land trusts to provide additional information or take corrective action. We often see that the initial information that comes in with the application might not fully meet the requirements – whether it's a policy or the financial reports – so land trusts are given time to take corrective action and convey the updated information back to the Commission.
