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What the New FASB Accounting Standards Will Mean for Your Nonprofit

By on January 15, 2018 in News

Read on to find resources on this topic, and scroll down to learn more.

Resources:

WVNPA Webinar: New FASB Rules – An Overview of Changes to Preparing Nonprofit Financial Statements

FASB’s New Financial Reporting Rules for Nonprofit Organizations: What You Need to Know – National Council of Nonprofits

Part 1: Preparing for the One BIG Change in Nonprofit Financial Reporting per FASB – Nonprofit Quarterly

Part 2: Are You Ready to Comply with New FASB Guidelines? – Nonprofit Quarterly

Part 3: Disclosures, Endowments, and Cash Flows-Oh My! – Nonprofit Quarterly

*NEW* Part 4: What’s Next? Implementation Strategies and Tips for Success – Nonprofit Quarterly

*NEW* FMA Fiscal Strength for Nonprofits

*NEW* FASB Resources – AccuFund

For the first time since 1993, the financial reporting standards for nonprofit organizations are being updated, with the goal of improving the communication of financial results to donors and other outside stakeholders. FASB Chairman Russell Golden said in a statement: “While the current not-for-profit financial reporting model held up well for more than 20 years, stakeholders expressed concerns about the complexity, insufficient transparency, and limited usefulness of certain aspects of the model,” said FASB Chairman Russell Golden’s statement. “The new guidance simplifies and improves the face of the financial statements and enhances the disclosures in the notes.”

With new emphases and expectations on transparency, nonprofits must learn how to present their financials in a way that will make sense to stakeholders, and these new guidelines will likely help. But the most significant value will be in the clarity that can be reached internally among those who must make sense of financial information for management and governance purposes.

The new guidance will be the standard for fiscal years beginning after December 15, 2017. For calendar year organizations, that will be calendar 2018. For fiscal year organizations, which typically end on June 30th, it will be the fiscal year beginning July 1, 2018.

Major changes were made in the following areas:

  1. Net Asset Classification

The new rules simplify the treatment of net assets in financial statements by focusing on the existence or absence of donor imposed restrictions as opposed to the types of restrictions (i.e., temporarily restricted vs. permanently restricted). The classification of temporarily restricted versus unrestricted assets has long been an area of confusion. Under the new rules the Statement of Financial Position will only have two classes of “Net Assets” – net assets with donor restrictions, and net assets without donor restrictions. The footnotes will also be changed to explain these classifications.

The new rules also replace the current three required classes of net assets (unrestricted, temporarily restricted, and permanently restricted) with two new classes (those with donor restrictions and those without donor restrictions).  The goal of this change is to simplify keeping track of donor imposed restrictions. Other advantages of this change are that the financial statements will now also provide more useful information about the nature, amounts, and types of donor restrictions.  Nonprofits will still have to track net assets and follow any restrictions imposed by donors; however, there is no longer a requirement to distinguish between temporarily and permanently restricted net assets.  Instead, new disclosure requirements will allow nonprofits to provide more useful information about limits placed on net assets by both boards and donors.

2. Liquidity and Availability

The new rules require quantitative and qualitative information to explain how an organization manages its liquid resources available to meet cash needs for general expenditures within one year of the balance sheet date.  The requirement for qualitative information will be satisfied by “classified” presentation on the statement of financial position (i.e., a breakdown of current and non-current assets and liabilities). The requirement for quantitative information will be satisfied by disclosure of whether or not a financial asset’s availability is limited by a.) its nature, b.) external limits imposed by donors, grantors, laws or contracts, or c.) internal limits imposed by governing boards.  The idea here is to inform the reader of the financial statements about any limitations on the use of liquid assets (typically cash and investments) by the nonprofit. Nonprofit managers should be ready to discuss these restrictions with their CPA performing the audit or review engagement.

3. Investment returns

The new rules require investment income to be reported net of related internal and external investment expenses (this is currently optional), but also eliminate the related requirement to disclose the amount of those netted investment expenses.  The result of this change is not only a consistent presentation across nonprofit entities, but also it gets rid of the difficulty and costs associated with identifying embedded investment fees in the investment returns used by some nonprofits, such as mutual funds and hedge funds.  Despite this change, nonprofit leaders should continue to make sure they are aware of the amount paid by the nonprofit for investment management fees.

4. Statement of Cash Flows

The new rules continue to allow nonprofits the freedom to choose to present operating cash flows using either the direct or indirect method (whichever method best serves the informational needs of those reading the nonprofit’s financial statements).  However, the new rules eliminate the requirement to present or disclose the indirect method in the notes if the direct method is presented on the statement of cash flows. The result is anticipated to be a more useful statement of cash flows and a reduction in costs to prepare the financial statements.  (Many organizations have avoided the use of the direct method because it essentially increased the cost of preparing and auditing the financial statements.)

5. Functional Expenses

The issue of classifying costs as program vs. overhead continues to be a focus in the sector. Under the new guidelines, not only must expenses be reported by function, but nonprofits must disclose the methodology used for allocations and whether the methods are consistently applied.

These changes will not materially affect how nonprofit finance teams handle underlying transactions; but staff will need to be ready to explain the difference in the look of the financial statements they present to the board and funders. Also, board members will need some training on the new rules as they pertain to their particular organization’s financial statements. Consider asking your nonprofit’s auditor to explain the impact of the new rules to your board of directors.

Content accredited to: National Council of Nonprofits, Nonprofit Quarterly, and Edward Mulherin CPA, Esq. of eCratchit Nonprofit.

 

 

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