A few months back our accounting specialists previewed the new FASB directives that were being finalized for nonprofits. Well, the new FASB standards have finally been issued and below is a brief summary of what they are all about.
The new standards, 8 years in the making, are quite detailed and the intent might be obscured by all the detail. In the space of this bog, we would like to highlight the three areas we think will have the most dramatic effect on the quality of future nonprofit financial reporting.
The new standards are designed to make nonprofit financial reporting more transparent and bring both the audit and the 990 into conformity so that donors, board members, and managers are all getting the same impression from consistent presentations.
THREE MAJOR CHANGES
- THE SIMPLIFICATION OF ASSETS - The three traditional categories of assets - Restricted - Temporarily Restricted - Permanently Restricted - were open to wide interpretation and were often mis-classified on the nonprofit balance sheet. These asset classifications have been reduced to two self-evident classifications -
- Assets with donor restriction - and -
- Assets without donor restriction. This simplification leaves little room for confusion as to what assets are available for use in the day-to-day operation of the nonprofit.
- LIQUIDITY - How much cash or near cash does an organization have on hand and how much of these liquid assets are available for use in the following fiscal year? No more creative classifications of donor funds or “in kind” assets that can make an organization appear liquid going forward when it is about to run out of operating cash.
- PRESENTATION OF EXPENSES - Like all health and welfare organizations who have always had to show the program expenses versus the overhead allocation, now all organizations will have this same requirement. Additional disclosures are going to require there be some explanation as to the methodology used to allocate expenses and what the end results are. Nonprofit organizations will have a choice whether they disclose it in the footnotes or in the financials themselves, but they will be required to disclose allocation methodology. In addition to doing it in the 990, which nonprofits always had to do, now they’ll have to do it in the audit, and it will be an important part of the disclosure.
The new directives have been a long time in the works and are overdue. Nonprofit accounting had drifted into vain attempts to obscure overhead because overhead had become a dirty word to donors and the general public. The resulting opacity of nonprofit financials was engendering a lack of trust between donors, boards, and management. The new FASB directives are designed to reestablish the integrity and the transparency of nonprofit financial reporting with the hope that a healthier relationship will develop between donors and management.