Financial statements provide a picture, a snapshot, of the state of your organization at one point in time – generally your fiscal year end – and how well you managed your funds over that fiscal year.
But that doesn’t complete the picture.
It is also important to inform the readers of your financial statements – your grantors, your lenders, your members and donors – about the future of your organization, in particular the financial implications of, you guessed it – commitments and contingencies.
Commitments are those obligations your organization is legally bound to, whether short-term or long-term, such as: leases of property or equipment; contracts for future purchases; or unused letters of credit or obligations to reduce debt.
Disclosing the nature, amount and terms and conditions of these commitments completes the picture of your organization’s cash position and potential liabilities. You may be planning a capital improvement but haven’t broken ground yet. You’ve entered into an agreement with the builder and that commitment should be disclosed to your readers.
Contingencies may or may not become liabilities. They are dependent on some uncertain future event, such as: risk of loss or damage to property; actual or possible claims; or pending or threatened litigation.
While you can’t predict the future and aren’t expected to account for any and all possible events, issues known to management at the time the financial statements are prepared should be disclosed. Your CPA will need to know, from you or your legal representative, the probability and potential gain or loss in order to properly disclose the contingency. A contingency may or may not appear on your balance sheet depending on the conditions, the amount and the probability.
Management will be preparing for the commitments and contingencies in the ordinary course of budgeting, cash management and overall strategic planning. It is equally important for the readers of your financial statements to be informed about those possible and/or probably future events. Contact your CPA for more details and advice regarding your specific situation.
Ryan Skuce joined Earney & Company, L.L.P. in 2003, and became a partner in November 2013. He works extensively with physicians, medical practices, and large medical groups. Ryan has experience in accounting and tax services including financial reporting and analysis, technical support, cash flow planning, physician compensation strategies, and medical practice strategic planning. He also has experience in the areas of accounting and tax for a variety of for profit and nonprofit clients. Ryan is currently a member of the American Institute of Certified Public Accountants (AICPA) and the North Carolina Association of Certified Public Accountants (NCACPA). Ryan works with his clients on evaluating operational and technical issues. He provides back-office accounting support, and recommends and assists in the implementation of ideas to cut overhead costs and streamline operations. With an in-depth knowledge of existing and proposed tax laws, Ryan often advises companies on tax deferment or savings through proactive structuring of transactions. He also assists his clients with Internal Revenue Service audits. He received his Masters of Science in Accountancy from UNC-Wilmington and resides in Wilmington, where he enjoys playing hockey with a local team.
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