Clarity of financial statements regarding net assets (Re: Audited financial statements for 2023)

Audited financial statements for the year 2023 are available now:
https://spi-inc.org/treasurer/2023-financial-statements.pdf

Form 990 for the year 2023 is also available:
https://spi-inc.org/treasurer/2023-990.pdf

You can consider the 2023 reports under "Financial reports" at
https://spi-inc.org/treasurer/
as final now.

Please let me know of there are any general questions. If there
are specific questions about your project, please contact
treasurer(at)spi-inc(dot)org

--
Martin Michlmayr
Contractor, Software in the Public Interest, Inc.

Thank you very much one more time Dr Michlmayr,

I just have a remark about presentation of our Statement of Financial
Position (page 3): I do not know accounting, but find the last line
("Total Liabilities and Net Assets") very confusing. It does not explain
how it differs from Total Assets.

I find the page as a whole arguably misleading for putting more emphasis
on "Total Liabilities and Net Assets" than on Net Assets. I believe the
latter should have *at least* as much emphasis as the former.

I know it is late for such a comment, but I did not see the statements
before they were audited.

Le 2024-11-19 à 21:55, Martin Michlmayr a écrit :
> Audited financial statements for the year 2023 are available now:
> https://spi-inc.org/treasurer/2023-financial-statements.pdf
>
> Form 990 for the year 2023 is also available:
> https://spi-inc.org/treasurer/2023-990.pdf
>
> You can consider the 2023 reports under "Financial reports" at
> https://spi-inc.org/treasurer/
> as final now.
>
> Please let me know of there are any general questions. If there
> are specific questions about your project, please contact
> treasurer(at)spi-inc(dot)org
>
--
This mail's original content (non-quoted parts) is available under the Creative Commons Attribution-ShareAlike License 4.0.

Philippe Cloutier
https://www.philippecloutier.com

This is a very standard Statement of Financial Position and they all
look the same.

Unlike the monthly treasurer reports, which need to be completely
reworked for clarity, in this case it comes down to your observation
about accounting knowledge.

I suggest you read about the accounting equation; this web site is very
good: https://www.dwmbeancounter.com/

Basically, Assets = Liabilities + Equity

Let's say you have a house worth 1000k (assets), but you owe the bank
a 800k mortgage; that means your equity ("net worth") is 200k. 1000 =
800 + 200 In order words, you have a house but you also have debts, so
really your net worth is 200k.

Net Assets == Equity == (in personal finance) net worth

So, looking at SPI's 2023 financial statements, you see SPI has 2858k
worth of stuff (assets: cash, investments, hardware); that's the house
in the previous example. But SPI also has some payables (113k) and so
what belongs to SPI is 2745k (the math is 2858 - 113 = 2745).

To put this back in the accounting equation: 2858 = 113 + 2745 This
is what you'll see in the statement.

So, net assets are different to assets because of "debts" (we don't
have loans but there are obligations to pay certain things sometimes
and there was a big one at the end of 2023).

(Things have become more complicated from a reporting perspective when
we moved from the cash basis to the accruals basis a few years ago,
but it gives a more accurate view.)

Anyway, if you look at Net Assets, the 387k figure is SPI's General
Fund whereas the 2357k figure is funds held for projects. If you go
to the page, you'll see the fund report which shows the funds for each
project and the total matches the 2357k figure.

I hope that helps.

Martin

* Philippe Cloutier <chealer(at)gmail(dot)com> [2024-11-20 08:45]:
> Thank you very much one more time Dr Michlmayr,
>
> I just have a remark about presentation of our Statement of Financial
> Position (page 3): I do not know accounting, but find the last line ("Total
> Liabilities and Net Assets") very confusing. It does not explain how it
> differs from Total Assets.
>
> I find the page as a whole arguably misleading for putting more emphasis on
> "Total Liabilities and Net Assets" than on Net Assets. I believe the latter
> should have *at least* as much emphasis as the former.
>
> I know it is late for such a comment, but I did not see the statements
> before they were audited.
>
> Le 2024-11-19 à 21:55, Martin Michlmayr a écrit :
> > Audited financial statements for the year 2023 are available now:
> > https://spi-inc.org/treasurer/2023-financial-statements.pdf
> >
> > Form 990 for the year 2023 is also available:
> > https://spi-inc.org/treasurer/2023-990.pdf
> >
> > You can consider the 2023 reports under "Financial reports" at
> > https://spi-inc.org/treasurer/
> > as final now.
> >
> > Please let me know of there are any general questions. If there
> > are specific questions about your project, please contact
> > treasurer(at)spi-inc(dot)org
> >
> --
> This mail's original content (non-quoted parts) is available under the Creative Commons Attribution-ShareAlike License 4.0.
>
> Philippe Cloutier
> https://www.philippecloutier.com
>
>

--
Martin Michlmayr
Contractor, Software in the Public Interest, Inc.

On 2024-11-20 08:45:49 -0500 (-0500), Philippe Cloutier wrote:
[...]
> I do not know accounting, but find the last line ("Total
> Liabilities and Net Assets") very confusing. It does not explain
> how it differs from Total Assets.
[...]

I too am no accountant, but my understanding is that assets refers
to things of value which are owned while liabilities are what is
owed. The net difference (totaled liability amounts subtracted from
totaled asset values) is "net assets." In a sense, if the
organization were to be liquidated, assets would be sold off to
cover outstanding liabilities, and what's left over is the "net
assets" which is essentially the estimated liquidation value at that
time.
--
Jeremy Stanley

Total liability is what you owe, total asset is what you hold, and a net
asset is what you actually own.

Total asset is mathematically defined as net asset + total liability. So
they'll have same value, but are different things. Proving the mathematical
equation is true proves accounting had no glaring errors.

If you have 10 apples, promised to give out two, and think one of them will
be taken by sanitary vigilance, your total asset is 10, liability is 3 and
net asset is 7.

For profit companies may emphasize net asset because that's what you use
to, for example, distribute dividends. For NFP, a net asset is what wasn't
consumed yet by operations or is being reinvested. Usually however, both
receive the same emphasis, as the report is standardized in the whole world.

Last but not least, if you mean page 3, that's the column header.
Traditional balance has two columns, one for total assets and one for total
liabilities + net assets. When displaying everything as a single column,
you must emphasize the total liabilities + net assets so anyone reading
knows where the second column was supposed to start. Because, as I said
earlier, the report is standard in the whole world.

Regards,

Jonatas L. Nogueira (“Jesusalva”)
Vice President
Software in the Public Interest, Inc.

On Wed, Nov 20, 2024, 11:22 Philippe Cloutier <chealer(at)gmail(dot)com> wrote:

> Thank you very much one more time Dr Michlmayr,
>
> I just have a remark about presentation of our Statement of Financial
> Position (page 3): I do not know accounting, but find the last line
> ("Total Liabilities and Net Assets") very confusing. It does not explain
> how it differs from Total Assets.
>
> I find the page as a whole arguably misleading for putting more emphasis
> on "Total Liabilities and Net Assets" than on Net Assets. I believe the
> latter should have *at least* as much emphasis as the former.
>
> I know it is late for such a comment, but I did not see the statements
> before they were audited.
>
> Le 2024-11-19 à 21:55, Martin Michlmayr a écrit :
> > Audited financial statements for the year 2023 are available now:
> > https://spi-inc.org/treasurer/2023-financial-statements.pdf
> >
> > Form 990 for the year 2023 is also available:
> > https://spi-inc.org/treasurer/2023-990.pdf
> >
> > You can consider the 2023 reports under "Financial reports" at
> > https://spi-inc.org/treasurer/
> > as final now.
> >
> > Please let me know of there are any general questions. If there
> > are specific questions about your project, please contact
> > treasurer(at)spi-inc(dot)org
> >
> --
> This mail's original content (non-quoted parts) is available under the
> Creative Commons Attribution-ShareAlike License 4.0.
>
> Philippe Cloutier
> https://www.philippecloutier.com
>
>
>
>

Le 2024-11-20 à 09:21, Martin Michlmayr a écrit :
> This is a very standard Statement of Financial Position and they all
> look the same.
>
> Unlike the monthly treasurer reports, which need to be completely
> reworked for clarity, in this case it comes down to your observation
> about accounting knowledge.
>
> I suggest you read about the accounting equation; this web site is very
> good:https://www.dwmbeancounter.com/
>
> Basically, Assets = Liabilities + Equity
>
> Let's say you have a house worth 1000k (assets), but you owe the bank
> a 800k mortgage; that means your equity ("net worth") is 200k. 1000 =
> 800 + 200 In order words, you have a house but you also have debts, so
> really your net worth is 200k.
>
> Net Assets == Equity == (in personal finance) net worth
>
> So, looking at SPI's 2023 financial statements, you see SPI has 2858k
> worth of stuff (assets: cash, investments, hardware); that's the house
> in the previous example. But SPI also has some payables (113k) and so
> what belongs to SPI is 2745k (the math is 2858 - 113 = 2745).
>
> To put this back in the accounting equation: 2858 = 113 + 2745 This
> is what you'll see in the statement.
>
> So, net assets are different to assets because of "debts" (we don't
> have loans but there are obligations to pay certain things sometimes
> and there was a big one at the end of 2023).
>
> (Things have become more complicated from a reporting perspective when
> we moved from the cash basis to the accruals basis a few years ago,
> but it gives a more accurate view.)

Yes, I am not entirely clueless about accounting; what I meant is that I
don't have (significant) education about it and have never been involved
in the production of such statements. What I was talking about is the
emphasis on "Total Liabilities and Net Assets" (the house's value)
rather than net assets (what actually belongs to SPI and its projects).

>
> Anyway, if you look at Net Assets, the 387k figure is SPI's General
> Fund whereas the 2357k figure is funds held for projects. If you go
> to the page, you'll see the fund report which shows the funds for each
> project and the total matches the 2357k figure.

OK

>
> I hope that helps.

After reading the explanation from Jonatas L. Nogueira,
https://www.investopedia.com/terms/b/balancesheet.asp and reading all
our statements, I feel like I understand fairly well now.

Basically, what I understand from the mail by Jonatas is that:

1. The Statement of Financial Position puts the emphasis on the same
information computed in 2 different ways.
2. The reason for emphasizing these lines even though they are
redundant and not the most important is to show that our
computations are credible (in other words, "look, our values match,
there is no glaring mistake!").
3. The format of balance sheets is rather standardized, and the
location of emphasis was determined by existing conventions. See
https://www.investopedia.com/terms/b/balancesheet.asp#toc-example-of-a-balance-sheet

I guess the mistake I made is to focus on the Statement of Financial
Position, when in fact SPI's financial situation (at the end of 2023) is
clearest in our Statement of Activities, on page 4, which adequately
emphasizes the 2,745,152 USD figure.

The current format may serve accountants well, but it does not offer
optimal clarity for non-accountants (the vast majority of SPI
contributors). Unless we are willing to change the Statement of
Financial Position's format, here are a bunch of quick suggestions/ideas
to help with serving our main audience:

1. Avoid referring to "financial position" in the title of the
Statement of Financial Position?? Call it "Balance Sheet" instead?
2. Put the Statement of Activities before the Statement of Financial
Position?
3. Rename the Statement of Activities? "Statement of Activities and Net
Assets"?
4. Do not underline "Restrictions" in the Statement of Activities' headers.
5. Put more emphasis on 2023 in the Statement of Activities. Perhaps
making the amount at the bottom (2,745,152) in bold.

Thank you for your intervention Jonatas

>
> Martin
>
>
>
>
>
> * Philippe Cloutier<chealer(at)gmail(dot)com> [2024-11-20 08:45]:
>> Thank you very much one more time Dr Michlmayr,
>>
>> I just have a remark about presentation of our Statement of Financial
>> Position (page 3): I do not know accounting, but find the last line ("Total
>> Liabilities and Net Assets") very confusing. It does not explain how it
>> differs from Total Assets.
>>
>> I find the page as a whole arguably misleading for putting more emphasis on
>> "Total Liabilities and Net Assets" than on Net Assets. I believe the latter
>> should have *at least* as much emphasis as the former.
>>
>> I know it is late for such a comment, but I did not see the statements
>> before they were audited.
>>
>> Le 2024-11-19 à 21:55, Martin Michlmayr a écrit :
>>> Audited financial statements for the year 2023 are available now:
>>> https://spi-inc.org/treasurer/2023-financial-statements.pdf
>>>
>>> Form 990 for the year 2023 is also available:
>>> https://spi-inc.org/treasurer/2023-990.pdf
>>>
>>> You can consider the 2023 reports under "Financial reports" at
>>> https://spi-inc.org/treasurer/
>>> as final now.
>>>
>>> Please let me know of there are any general questions. If there
>>> are specific questions about your project, please contact
>>> treasurer(at)spi-inc(dot)org
>>>
>> --
>> This mail's original content (non-quoted parts) is available under the Creative Commons Attribution-ShareAlike License 4.0.
>>
>> Philippe Cloutier
>> https://www.philippecloutier.com
>>
>>
--
Philippe Cloutier
https://www.philippecloutier.com

* Philippe Cloutier <chealer(at)gmail(dot)com> [2024-11-20 11:27]:
> Yes, I am not entirely clueless about accounting; what I meant is
> that I don't have (significant) education about it and have never
> been involved in the production of such statements. What I was
> talking about is the emphasis on "Total Liabilities and Net Assets"
> (the house's value) rather than net assets (what actually belongs to
> SPI and its projects).

It's because of the accounting equation: Assets = Liabilities + Equity

While "Assets" and "Liabilities and Net Assets" are on the same page,
a better way to image it is "Assets" on the left side and "Liabilities
and Net Assets" on the right side and both sides have to match (as per
the accounting equation).

In any case, to answer your question, this is a standard way to
present financial statements.

If you look at e.g. Mozilla (prepared by a different accounting firm),
you see exactly the same:
https://assets.mozilla.net/annualreport/2022/mozilla-fdn-2022-fs-final-0908.pdf
(page 5)

Or Tor: https://www.torproject.org/static/findoc/2021-2022-The_Tor_Project-AuditedFinancialStatements.pdf?h=1fe92666
(page 11), prepared by yet another accounting firm.

So, rest assured, SPI's report is following accounting norms.

For most projects, the last page in SPI's financial statements (the
fund report) is probably the most interesting one anyway.

--
Martin Michlmayr
Contractor, Software in the Public Interest, Inc.

Le 2024-11-20 à 20:27, Martin Michlmayr a écrit :
> * Philippe Cloutier <chealer(at)gmail(dot)com> [2024-11-20 11:27]:
>> Yes, I am not entirely clueless about accounting; what I meant is
>> that I don't have (significant) education about it and have never
>> been involved in the production of such statements. What I was
>> talking about is the emphasis on "Total Liabilities and Net Assets"
>> (the house's value) rather than net assets (what actually belongs to
>> SPI and its projects).
> It's because of the accounting equation: Assets = Liabilities + Equity
>
> While "Assets" and "Liabilities and Net Assets" are on the same page,
> a better way to image it is "Assets" on the left side and "Liabilities
> and Net Assets" on the right side and both sides have to match (as per
> the accounting equation).
>
> In any case, to answer your question, this is a standard way to
> present financial statements.
>
> If you look at e.g. Mozilla (prepared by a different accounting firm),
> you see exactly the same:
> https://assets.mozilla.net/annualreport/2022/mozilla-fdn-2022-fs-final-0908.pdf
> (page 5)
>
> Or Tor: https://www.torproject.org/static/findoc/2021-2022-The_Tor_Project-AuditedFinancialStatements.pdf?h=1fe92666
> (page 11), prepared by yet another accounting firm.
>
> So, rest assured, SPI's report is following accounting norms.

Yes, I'm sorry if that wasn't clear, but neither the exactitude nor the
validity of the report are the matter. This is really about clarity and
I fully agree that the confusion is not specific to SPI. I'd even say
both of the examples you mention are worse.

As for potential improvements, Mozilla's document titles the second
statement close to my suggestion: "Consolidated Statement of Activities
and Change in Net Assets".

>
> For most projects, the last page in SPI's financial statements (the
> fund report) is probably the most interesting one anyway.
>
--
This mail's original content (non-quoted parts) is available under the Creative Commons Attribution-ShareAlike License 4.0.

Philippe Cloutier
https://www.philippecloutier.com