Explanation of Financial Graphs and Accounting Practices
As a Board, we recognize that not all of our members may be familiar with accounting concepts, rules, or AAMFT practices. Therefore, we would like to provide a brief explanation of the graphs regarding surplus and deficit trends and revenue/expense trends over the last decade.
First, the AAMFT operates under an accrual accounting system. Among other things, this means that we must show all outstanding liabilities, as well as assets, for the period of each audit or financial statement. This accounting matters because the organizations investment reserves must be shown at market value on the date of the audit or financial statement, whether the losses or gains are realized or unrealized.
Realized gains or losses occur when a person or entity sells a financial instrument—a bond, stock, etc. Unrealized gains or losses show the market value of those instruments on any given day, even though the asset (bond, stock, etc.), is still held by the individual or entity. For 2008, there were significant unrealized losses. That is, while AAMFT still held stocks and bonds, the market value of those stocks and bonds diminished in that year.
Second, under accounting rules, AAMFT must include unrealized gains/losses in the income statement. This means that any losses are “marked off” against revenue. (Alternatively, gains are added to revenue.) Therefore, actual cash revenue is not shown on a statement of financial position, but a statement of cash flow (for which there is no chart in the series of charts on this web page).
The implications of these accounting rules are important, because failure to understand them can lead to a serious misreading of AAMFT’s financial trends and conditions. While some may look with alarm at the revenue/expense trends, or the surplus/deficit trends, especially for 2008, the apparent “loss of revenue” and deficit occurred because of paper losses in AAMFT’s investments. The actual cash and operating position of AAMFT remains very strong. In fact, our auditors report that AAMFT has a much stronger cash position than the vast majority of their association clients.
In 2008, AAMFT operated with a cash surplus of $200,000. That is, in actual dollars in and out of the door, AAMFT took in more money than was spent. This management success occurred at the same time that all organizations lost money due to market investment losses.
AAMFT’s reserves dropped in value approximately 1,575,000 dollars. There is no question that is a significant drop in value, representing about 28% of AAMFT’s cash reserves. Since December 31, 2008, there has been a significant recovery in the value of AAMFT’s investment reserves. (As a note, AAMFT’s investments are managed by a very well respected investment research firm, Bernstein Global Wealth Management.)
Further, because the unrealized losses needed to be “marked” against revenue, the actual cash revenues of the Association were 1.75 million more than is shown on the chart of revenue/expense trends. In “cash” terms, the graph would look more like the results for 2003.
The Long View--
When reviewing the charts consistently with the underlying accounting principles, AAMFT has been adding to its reserves consistently over the years.
The exceptions are as follows:
2001--- when the organization began its investment in real estate (with a $250,000 deposit placed on the building that year, and with the market downturn related to 9/11; 2002
2002--when there was a planned deficit to purchase the headquarters building and move to Alexandria (We thought it would take over three years to recover the cash paid out to purchase the headquarters building. In fact, we recouped all of those expenditures in the first year after the building purchase.
2008—due to unrealized investment losses
The external auditors for AAMFT have said consistently that AAMFT shows one of the strongest balance sheets of the over 350 non-profits for which they perform audits.