Happy spring! We’re now officially a quarter of the way through the year, which means the clock is ticking for your nonprofit to adopt some important new accounting standards. In case you haven’t heard, the Financial Accounting Standards Board, or FASB, recently released a long-awaited update to rules for nonprofit organizations. This update affects the financial statement presentation of not-for-profit entities. That means, while you won’t necessarily have to change any of your internal accounting systems or procedures, you will need to learn how to present that financial information in a different way. You may want to schedule a conversation between your management and finance teams, along with any independent auditors, to ensure that everyone understands the new requirements.
Here’s What’s Changing
Net Asset Classification
Currently, net assets are classified under three possible categories: unrestricted, temporarily restricted, and permanently restricted. With the new standard, there will now be two net asset classifications: net assets without donor restrictions and net assets with donor restrictions. The idea of this change is to help eliminate some of the complexity surrounding donor restrictions.
Presentation of Expenses
Health and welfare organizations are currently required to show expenses by both nature and functional category, while other nonprofit organizations are required to present expenses only by functional category. To help eliminate confusion in this area, the new standard will require all nonprofit organizations to present expenses by both nature and functional category. This means that the Statement of Functional Expenses will become a required statement for all nonprofits.
Information on Liquidity
The new standard will increase information about liquidity and the availability of an organization's resources. It will require organizations to provide certain qualitative and quantitative information as to how they manage liquidity. This will be achieved through enhanced disclosures and some potential changes to the presentation on the Statement of Activities and Statement of Financial Position.
Underwater Endowment Funds
Any underwater endowment funds will now have to be reflected in the unrestricted category of net assets (as opposed to within donor-restricted net assets).
Investment Return
The presentation of investment returns will be standardized among all nonprofits. The new rules will also standardize what expenses should be netted against those returns. Currently, this area has different options that can vary among organizations.
Cash Flow Statements
Not-for-profit entities will be allowed to present the statement of cash flows using the direct method (starting with cash receipts) without also requiring an indirect reconciliation (starting with change in net assets) for the operating cash flow section. This is a minor change, but one that will simplify the presentation of cash flows and eliminate unnecessary duplication of efforts.
These new rules take effect for fiscal years starting after December 15, 2017. But why wait? Early implementation is allowed and, in fact, may be the best approach for many organizations. Talk to your accountant today to ensure proper implementation and determine the specific impacts the update may have on your nonprofit organization.