Archive:2008-2009 Financial Statements Questions and Answers

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What is the period of time covered by these statements?

The statements cover two periods; the latest Fiscal Year 2008-09 which dates from July 1, 2008 until June 30, 2009 as well as the previous Fiscal Year 2007-08 which dates from July 1, 2007 to June 30, 2008.

What do these statements represent?

These are the audited financial statements of the Wikimedia Foundation, covering July 1, 2008 to June 30, 2009 and July 1, 2007 to June 30, 2008. 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 2009-10 Fiscal Year. The 2009-10 Fiscal Year runs from July 1, 2009 to June 30, 2010: its midpoint is end of December 2009. We expect the mid-year financial statements to be complete by January 31, 2010; they will probably be distributed publicly by the end of February 2010.

How do the financial statements for 2008-09 compare with the statements for 2007-08? What's the overall takeaway message?

In general, both revenue and spending increased compared with 2007-08 (just as both increased from 2006-07 to 2007-08 as well). Contributions and revenue increased and we increased spending to fill much needed positions such as Tech hires and Fundraising staff.

What happened to donations in 2008-09, compared with 2007-08?

Compared with 2007-08, in 2008-09 donations increased 20%, from $6.4mm to $7.7mm. This increase is very significant given the fact that the 2007-08 donations included the $3mm pledge from Sloan Foundation while 2008-09 did not. Community gifts (gifts of less than 10K) increased significantly to $5.1mm from $2.6mm. Overall, revenue increased to $8.7mm from $7.1mm. This is good news: we are happy that so many people want to support the work of the Wikimedia Foundation. It's especially good news because 2008-09 was a difficult year in the global economy. We are really glad that our overall support increased significantly, in such a difficult year.

Why did you include the full "pledge" from the Sloan Foundation in your overall revenue statement for 2007-08?

Accounting practices require us to declare the entire $3mm pledge from the Sloan Foundation into our revenue statement in the year that it is promised. The actual payments of the pledge are $1mm per year for 2007-08, $1mm per year for 2008-09 and $1mm per year for 2009-10.

Isn't it unusual, or unwise, to include the full $3m pledge in your 2007-08 statements, if you have only received $1mm?

Actually, we are required to record the pledge this way, under U.S. GAAP (generally-accepted accounting principles): it is not a decision we get to make ourselves. We don't include in our revenues verbal commitments or soft promises, but we do -and are required to- include pledges in which both parties have signed a legally enforceable agreement. During 2007-08, the Sloan Foundation and the Wikimedia Foundation signed a contract agreeing that $3mm will be transferred to Wikimedia over three years: in those circumstances it is standard to include the full total in our revenues for the year in which the agreement was signed.

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 2008-09, compared with 2007-08, income in all our major revenue streams increased. We attribute this increase to the new revenue-generating staff hired by the Wikimedia Foundation over the past two years.

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. In 2008-09, in-kind revenue increased substantially over previous years. Part of the reason the Wikimedia Foundation moved to San Francisco from Florida in 2007 was to enable it to form relationships with companies that want to help us meet our goals. That has now started to happen: in 2008-09, the Bay Area legal firm Wilson Sonsini donated a substantial amount of pro bono legal help to the Wikimedia Foundation, and the Wikimedia Foundation developed relationships with Bay Area technology firms that resulted in substantial in-kind donation of hardware.

What is "investment income"?

Investment income is derived from the gains and losses related to the sale of stock received as donations, interest income earned on some of our cash balances and foreign exchange gains and losses which result primarily from our non-U.S. dollar denominated Paypal accounts.

The cash balance has increased from $3mm to over $6mm. 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 unforseen 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.

The Wikimedia Foundation (founded in 2003) is a fairly young organization, and like other young non-profits, it has gradually increased the size of its reserve over time. We are happy to have been able to grow our reserve to its current amount. 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.

The Wikimedia Foundation is beginning to assess what size of reserve will be appropriate as the Wikimedia Foundation continues to grow, and what investment strategy will make sense for us. It is also beginning to look at longer-term financial sustainability, including the question of when the Wikimedia Foundation might be well-positioned to launch an endowment campaign. Questions like these will also be discussed as part of the Financial Sustainability task force in the Strategic Planning process, which is scheduled to complete its work at the end of 2009-10.

What are included in various items on the Balance Sheets such as "Current portion of contributions receivable", "Investments" and "Deferred revenue"?

The notes to the financial statements which immediately follow the Statements of Cash Flows provide detailed explanations.

Why did you change the method of depreciation in 2007-08 from double-declining to straight-line?

The straight-line method is a more standard method for audit purposes. Double-declining depreciation is more typically used for an organization's tax records as opposed to their audit records.

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 2008-09 year, the Foundation received in-kind service revenue of $578K, in-kind equipment donations of $128K and stock donations of $257K. In the 2007-08 year, the Foundation received in-kind revenue of $313K and stock donations of $50K.

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: Support, Fundraising and Programs. In part, this allocation is straightforward and objective: for example, the Wikimedia Foundation's spending on bandwidth and servers is clearly 100% program 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 who 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. In 2008-09, 64% 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 general office expenses such as rent, business insurance, and the salaries of the administrative and finance staff. In 2008-09, 15% 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, 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 2008-09, the Wikimedia Foundation spent 1.1 million on fundraising, up from 0.2 million last year. This was a planned increase: it represents the addition of three fundraising salaries to the Wikimedia staff, the full-year salary of the fourth fundraising staff person and increased allocations of overhead expenses due to fundraising salaries comprising a larger percentage of overall salaries. The Wikimedia Foundation wants to grow its programmatic activities, and in order to do that, it needs to first make an investment in fundraising. In 2008-09, 21% of Wikimedia Foundation spending was spent in the fundraising category.

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 Form 990 (which covers the fiscal year July 1, 2008 to June 30, 2009) is not yet complete. However, a close estimate for the ratios can be calculated using the audited financial statements. As such, the efficiency for 2008-09 is $0.12 and for 2007-08 was $0.03. The ratio has gone up considerably for two reasons: (1) the 2007-08 year included the $3mm Sloan gift (without that gift, the ratio is $0.07) and (2) in 2008-09 we had the first year of a full-fledged fundraising staff. Despite the increase, 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.

How would you characterize the Wikimedia Foundation's spending on overhead in 2008-09 versus 2007-08? Is it appropriate to the size and scale of the organization?

Yes. Young non-profits need to invest in administrative and fundraising spending, in order to lay the groundwork to support programmatic activities. The Wikimedia Foundation has now done that. Spending on administration and fundraising will need to continue to increase to support growth in programmatic activities, but we believe the initial investment has now concluded. In general, the Wikimedia Foundation takes seriously its responsibility to carefully manage donors' money, and aims to curtail spending on support activities, in order to dedicate as much money as possible towards programmatic activities. Our office is modest, we do not spend lavishly on donor engagement, and we aim to curtail spending on travel and similar activities, wherever possible.

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 2010.

When will the 2008-09 Form 990 be published?

Work on the Form 990 for 2008-09 is beginning now. It will probably be completed, approved by the Board, and published by end of February 2010.