Archive:2009-2010 Financial Statements Questions and Answers

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WMF Frequently Asked Questions (FAQs) for the 2009-10 Audited Financial Statements (http://upload.wikimedia.org/wikipedia/foundation/c/cc/FINAL_09_10From_KPMG.pdf)

What is the purpose of the FAQs?

The purpose of the FAQs is to give a general overview of the audited financial statements and to give more detail to areas that have received many inquiries in the past. Detailed information that is available in the footnotes to the financial statements is generally not repeated in the FAQs. The footnotes are an integral part of the financial statements and should be read in their entirety; footnote #1 contains a lot of descriptive information such as an explanation of what is contained in particular lines of the Balance Sheets and Statements of Activities.

What is the period of time covered by these statements?

The statements cover two periods; the latest Fiscal Year 2009-10 which dates from July 1, 2009 until June 30, 2010 as well as the previous Fiscal Year 2008-09 which dates from July 1, 2008 to June 30, 2009.

What do these statements represent?

These are the audited financial statements of the Wikimedia Foundation, covering July 1, 2009 to June 30, 2010 and July 1, 2008 to June 30, 2009. They have been prepared by the accounting and financial staff of the Wikimedia Foundation, and a certified public accountant representing our audit firm has certified that they meet the requirements of the U.S. GAAP (generally accepted accounting principles). These audited statements have been given to the Wikimedia Foundation audit committee, which has approved them and given them to the Wikimedia Foundation Board of Trustees. The Board has also approved the statements.

Who is the Wikimedia Foundation's audit firm?

The Wikimedia Foundation's audit firm is KPMG. We selected KPMG as our new audit firm when we relocated to San Francisco.

What is the purpose of these statements?

Financial statements provide an overview of basic information about an organization's financial position. Financial statements are normally read by a number of different audiences, including the management of the organization, board members, donors and others.

Who created these statements?

The statements were made by the accounting and financial staff of the Foundation for the Executive Director.

When will we see the next financial statements?

The Wikimedia Foundation will be releasing basic, unaudited, mid-year financial statements later in the 2010-11 Fiscal Year. The 2010-11 Fiscal Year runs from July 1, 2010 to June 30, 2011: its midpoint is end of December 2010. We expect the mid-year financial statements to be complete by January 31, 2011; they will probably be distributed publicly by the end of February 2011.

How do the financial statements for 2009-10 compare with the statements for 2008-09? What's the overall takeaway message?

In general, both revenue and spending increased compared with 2008-09. Contributions and revenue increased and we increased spending in three ways-one-time spending for the Strategic Plan, the Bookshelf project and the Communications Campaign (approx. $1.5 million), spending related to donor-restricted funding such as improving user-friendliness (Stanton Foundation) and Wikimania scholarships (OSI and Lounsbery Foundations), (approx. $600K) and finally spending related to our core operations which included additional Tech and other Programmatic hires, increased rent and operating costs related to increased hiring, higher hosting costs and spending on grants awarded to chapters and individuals.

What happened to donations in 2009-10, compared with 2008-09?

Compared with 2008-09, in 2009-10 donations increased 87%, from $7.7 million to $15.1 million. Community gifts (gifts of less than 10K) increased significantly to $9.0 million from $5.1 million. Overall, revenue increased to $16.6 million from $8.7 million. This is good news: we are happy that so many people want to support the work of the Wikimedia Foundation and that people continue to support us during continued troubled economic times.

What are your other revenue sources?

The vast majority of our revenue comes from donations from individuals: we are happy that every year, hundreds of thousands of people around the world support the Wikimedia Foundation by making an individual donation. We also receive gifts from corporations and foundations, and we bring in what the IRS calls "earned income" (see note below). We also bring in a small amount of revenue from other sources such as investment income and speaker fees. In 2009-10, compared with 2008-09, income in all our major revenue streams increased.

What is other income?

The "other income" line is mainly made up of our "earned income," the revenue we earn through mission-friendly business activities such as the sale of live-feed data services and trademark license agreements. It also includes speaker fees.

What is "in-kind" revenue?

Goods and services that would normally be paid for but have been donated to us at no charge, such as bandwidth and hosting services and pro-bono legal services. Further detail is available in the Footnotes to the Financial Statements under Noncash Contributions (Note 1(k)).

What is "investment income"?

Investment income is derived from the gains and losses related to the sale of stock received as donations and interest income earned on some of our cash balances. In 2009-10 we earned less interest on our cash balances despite a larger cash balance because we elected to keep cash in non-interest bearing accounts that were guaranteed regardless of balance. After the guarantee program offered by the U.S. Government ended, cash reserves were transitioned to investment in low-risk investments such as money market accounts and U.S. Treasury bills as well as C.D.s.

Our investment philosophy favors preservation of capital and liquidity over higher yields, which come with more risk.

The cash balance (including investments) has increased from $6.2 million to over $12.7 million. What is the Wikimedia Foundation's view on its increasing cash reserve?

The Wikimedia Foundation wants to have an appropriate amount of cash in reserve. This is important for stability and the overall financial health of the organization. A non-profit wants to ensure it has a sufficient amount of cash available to it, so that it doesn't face a crisis in the event that unforeseen costs arise, or that an external or internal event hurts its ability to fundraise.

Different non-profits have different levels of reserves: it is common for young or very small non-profits to have as little as a few months' spending available in their reserve fund: others may have as much as three years' spending in theirs. There is no generally accepted consensus on what size of reserve is appropriate but the Wikimedia Foundation has been able to grow its reserve over time. The current reserve represents less than one year of funding, at our current spending level. We believe that's appropriate for a growing non-profit of our size and age.

During the latter part of the 2009-10 fiscal year, and in part as a result of one of the recommendations of the Strategic Plan’s Financial Sustainability Task Force, the CFOO and Board Treasurer worked with the Audit Committee to create and approve an Investment Policy to guide the investment of excess cash/reserves. At this point in the organization’s maturity, the Committee concluded that investment should be considered short and intermediate term rather than long term. Furthermore, the investment policy states “preservation of principal and maintenance of liquidity shall be priorities over yield”.

What are non-cash contributions, and what non-cash contributions come into the Wikimedia Foundation?

Non-cash contributions include the in-kind revenue discussed above as well as donations that arrive in a form other than cash such as stock donations. In the 2009-10 year, the Foundation received in-kind service revenue of $503K and stock donations of $253K. In the 2008-09 year, the Foundation received in-kind service revenue of $578K, in-kind equipment donations of $128K and stock donations of $257K.

What is contained in "Operating expenses"?

Operating expenses include expenses for facilities such as rent, utilities, phones,etc., costs for outside contract services-i.e. hiring for expertise and/or capacity that the organization doesn’t have internally such as the hiring of the Bridgespan Group to facilitate the strategic planning process, staff recruiting costs, staff and volunteer development costs and fees related to collecting donations such as Paypal fees.

How is the “functional allocation of expenses” created?

The purpose of the functional expense statement is to show how much an organization spends on program activities that further the mission, as opposed to spending on administrative support and fundraising activities. Expenses are reviewed and allocated among three categories: Projects, General and Administrative Support and Fundraising. In part, this allocation is straightforward and objective: for example, the Wikimedia Foundation's spending on bandwidth and servers is clearly 100% project spending. Categorization of other spending is somewhat more subjective. For example, the Executive Director spends part of her time working in each category, and therefore her salary is allocated accordingly. However, the percentage of her salary allocated to each category is an estimate, not an exact representation of how her time was spent. There are no highly-explicit guidelines for how the functional allocation of expenses is arrived at: every non-profit does its best to create reasonable estimates. KPMG has reviewed our allocation statement in detail, and is comfortable with it.

In the functional allocation of expenses, what kind of spending occurs in the “Projects” category?

The "Projects" category includes all the work done by the Wikimedia Foundation that directly supports the Wikimedia mission. For example, it includes all technology spending with the exception of spending supporting the office (e.g., office equipment). That includes for example, servers, bandwidth and the salaries of the technical staff. It includes the salaries of staff that are carrying out programmatic activities: for example, staging Wikipedia Academy outreach events and directly supporting Wikipedia editors. It also includes costs associated with a number of other activities: for example, the costs of the all-chapters meeting, travel for editors to attend Wikimania, some costs supporting new forms of offline distribution of Wikipedia, and costs associated with legal defense of the projects. It also includes allocation of shared general costs such as rent, utilities and business insurance. Such costs are allocated based on the relative percentage of Project staffing costs against total staffing costs. In 2009-10, 77% of Wikimedia Foundation spending was spent on "Projects."

In the functional allocation of expenses, what kind of spending occurs in the “General and administrative” category?

The "General and administrative" category includes all costs associated with the Board and Advisory Board, as well as an allocation of general office expenses such as rent, business insurance, and the majority of the salaries of the administrative and finance staff. In 2009-10, 10% of Wikimedia Foundation spending was spent on "General and administrative."

In the functional allocation of expenses, what kind of spending occurs in the “Fundraising” category?

The "Fundraising" category includes all spending associated with fundraising activities. For example, it includes the salaries of the fundraising staff and part of the ED and DD's salaries as well as a small percentage of support staff salaries, expenses related to the online fundraiser (e.g., PayPal fees and the cost of improvements to our open-source donor database CiviCRM), and all fundraising-related travel costs. In 2009-10, 13% of Wikimedia Foundation spending was spent in the fundraising category. This percentage is lower than in 2008-09. While the dollars spent on fundraising increased slightly year over year, fundraising as a percentage of overall spending decreased (as project spending increased significantly).

What are the fundraising efficiency ratios for the organization and how does that compare to other charities?

Fundraising efficiency ratios attempt to show how much an organization spends to raise every dollar that it receives in contributions. A lower ratio is considered better because it reflects a lower amount of spending on fundraising. Many donors make a point of looking for this amount to help determine whether they want to donate to a particular charity. The ratio is calculated by taking the total fundraising expenses of an organization divided by total contributions. The caveat is that there is not a strict definition of how fundraising expenses are calculated, so some organizations may be more aggressive than others in reporting "low" fundraising expenses and thus achieve a lower and better ratio.

The ratio is typically calculated based on the amounts per the organization's IRS Form 990 since that is the one document that is required to be filed publicly. Our 2008-09 Form 990 (which covers the fiscal year July 1, 2009 to June 30, 2010) is not yet complete. However, a close estimate for the ratios can be calculated using the audited financial statements. As such, the efficiency for 2009-10 is $0.09 and for 2008-09 is $0.12. We are well within conservative range as the BBB Wise Giving Alliance (http://www.bbb.org/us/Charity-Standards/), Charity Navigator (http://www.charitynavigator.org/) and the American Institute of Philanthropy (http://www.charitywatch.org/) recommend nonprofits spend no more than 35 cents to generate one dollar of contributions.

Wikipedia and the other Wikimedia projects are written by volunteers. How do they fit into these financial statements?

Under U.S. GAAP, general volunteer activity is not reflected in a non-profit's financial statements. As a result, we do not attempt to quantify the value of volunteer contributions or include it as an in-kind donation of services. That is in no way intended to diminish the significance of the volunteer contribution: the projects wouldn't exist without it, and we value it enormously.

When will next year's audited financial statements be published?

Next year's audited financial statements will probably be released about the same time as this year: roughly, in November 2011.

When will the 2009-10 Form 990 be published?

Work on the Form 990 for 2009-10 is beginning now. It will probably be completed, approved by the Board, and published by end of March 2011.