The Financial Accounting Standards Board is about to issue its first upgrade in nonprofit reporting requirements since 1993.
The FAMCare blog has followed the development of these new reporting guidelines as the information came out of the FASB, and now we can report that they have been finalized. Accounting terminology and reasoning can often be arcane for nonprofit management who prefer to think more in terms of “mission” and “service”, so here is a brief summary that hopefully will make it a little easier to absorb the accounting lingo and logic.
The FASB has come up with a new designation for its directives – Accounting Standards Update (ASU) and this one for nonprofits is known as ASU 2016-14 (Topic 958). I know, you’re already rolling your eyes. Well, we’re here to help.
Why New Standards?
To make it simple, the purpose of these new reporting standards for nonprofits is to clarify liquidity for interested parties. It seems that the old way of reporting tended to obscure rather than clarify a nonprofit’s cash position and its ability to pay its bills. The confusion arose because of the peculiar nature of nonprofit assets.
- Some donations, for example, are made with donor restrictions attached and the funds can’t be used to pay expenses.
- Nonprofit Boards often designate a large portion of available cash for specific emergency purposes and that cash, although an asset on the balance sheet, is not available to management to pay current expenses.
- Often the endowment, a large portion of a nonprofit’s assets, cannot be diminished to pay expenses.
These peculiarities in nonprofit assets were not clearly explained in the financial statements of nonprofits in the past, and what looked like a ton of liquid or near liquid assets to the casual observer, in fact, were funds not available to management to pay the bills. Nonprofits with robust balance sheets were suddenly in financial trouble. Donors, fund raisers, bankers, and even nonprofit boards were all surprised and shocked. These new reporting standards are designed to clarify liquidity and prevent shock and surprise.
So, What’s New?
Here is a summary-in-brief of what you’ll have to do going forward:
- In the future, nonprofits will report only two classes of net assets rather than the former three classes.
- Net assets with donor restrictions
- Net assets without donor restrictions
- Present on the face of the statement of activities the amount of the change in each of the two classes of net assets.
- Report the amount of operating cash flows using either the direct or indirect method of reporting but no longer both.
- Report the amount and purpose of governing board designations.
- Report the composition of net assets with donor restrictions at the end of the period and how the restrictions affect the use of resources.
- Give qualitative information in the notes about how a NFP manages its liquid resources available to meet general expenditures.
- Classify expenses by both their natural and functional classification.
- Describe methods used to allocate costs among program and support functions.
- Report underwater endowment funds – now to be classified as part of net assets with donor restrictions.
- Report investment return net of external and direct internal investment expenses.
- Use the “placed-in-service” approach for reporting expirations of restrictions on gifts to be used to acquire long-lived assets.
The Best We Could Do
Although even that list may have gotten a little “wonky”, it was the best we could do to list the changes you will have to make. Believe it or not, the ASU 2016-14 document summarizes the purpose of these changes rather clearly.
“To clarify for the board, donors, bankers, and other interested parties a NFP’s…”
- Availability of resources to meet cash needs for general expenditures within one year of the date of the statement of financial position
- Liquidity and financial flexibility
- Financial performance during the period
- Service efforts and the ability to continue providing services
- Execution of its stewardship responsibilities and other aspects of its management’s performance
Well said! Let’s get on with it.