New Reporting Standards Clarified
In 2016, the Financial Accounting Standards Board (FASB) issued new rules for nonprofit organizations, “Presentation of Financial Statements for Not-for-Profit Entities.” These new rules, effective for organizations with calendar year 2018 and fiscal year 2019 year ends, were the first significant changes for nonprofit financial statements in 25 years.
In June 2018, the FASB released a clarification to the 2016 rules regarding contributions of cash and other assets received by nonprofit organizations. With this clarification in place, nonprofit organizations have more guidance about the key changes required for the presentation of their financial statements.
The new rules apply to nonprofits that are required by statute to have audited financial statements. Depending on your year-end date, your organization may have already implemented these changes.
Here are the three most significant changes included in the new rules: redefining net assets, clarifying liquidity disclosures, and presentation of expenses.
Restricted and Unrestricted Net Assets
The treatment of net assets has been a source of confusion for years. The new rules moved from three net asset classes: unrestricted, temporarily restricted, and permanently restricted, to just two — net assets with donor restrictions and net assets without donor restrictions.
The biggest impact in this area relates to documentation and donation tracking, following donor restrictions about how contributions can be spent. The most significant accounting change happens at year’s end when net assets must be presented on the financial statements as with or without donor restrictions.
Liquidity Disclosures and Measures
Liquidity is a measure of how easily your organization can meet ongoing operational expenses within the standard accounting period—one year from the balance sheet date.
The new rules require a quantitative display of liquidity, as well as a qualitative explanation of methodology. Qualitative information describes whether an asset is limited by the nature of the asset itself, by externally imposed limits, bylaws or contracts, or by internal limits imposed by the governing board, as well as how the organization handles its liquidity.
Presenting Functional Expenses
This new requirement relates to how much detail a nonprofit organization must provide about its expenses. The standard requires that expenses not only be broken out by functional category, such as program services, administrative, and fundraising, but also by line item, such as salaries, rent, mortgage interest, travel, and so on. (Some nonprofit organizations were already required to present this information.)
Because this area of the financial statement can be used—or misused—to show the cost of advancing the organization’s mission, it’s important to break down the nature of functional expenses to support clearer understanding by stakeholders.
For example, breaking out each program from under the general functional expense report to show the true program cost can better tell the story of the overall mission. Of course, this means you must be able to accurately track, prepare, and present this information to support the mission.
The new standards also include guidance on a number of other topics, including endowments. Consider asking your CPA to explain the strategic impact of these changes to your board.
If you or your board have any questions about accounting standards, our team will be happy to answer them. Please contact us here or give us a call at 512.610.7200.