A Breakdown of the New Not-for-profit Accounting Standard
“A Breakdown of the New Not-for-profit Accounting Standard” by Chris Benko, CPA | Principal – Audit & Assurance
Last year, the Financial Accounting Standards Board (FASB) announced that it would issue ASU 2016-14, a new not-for-profit (NFP) accounting standard that would update the current financial reporting model contained in generally accepted accounting principles (GAAP). This means that NFPs around the country will have to follow these standards starting with years beginning after Dec. 15, 2017.
That means you have a few months to get ready for the new FASB update. Of course, noncompliance with accounting standards could shut an organization out of crucial funding that it received in the past or may receive in the future. In order to maintain a clean review for donors, it’s critical that NFPs follow the guidelines of the new FASB update.
As always, a new standard also means that NFP accountants have a lot more work to do adapting to these standards and changing certain processes. Let’s break down the changes in the new FASB update that can affect your organization.
What’s New in the FASB Update?
Changes to Net Asset Clarifications
In the past, NFPs had three different net asset clarifications: restricted, temporarily restricted, and permanently restricted. The new accounting standard will cut that list down to just two categories:
- Net assets with donor restrictions
- Net assets without donor restrictions
Many net assets are restricted by the donors for a certain use or timing. The FASB update combines these assets along with permanently restricted assets, such as endowments, into one clarification based around donor restrictions. The update also notes that NFPs will need to disclose details on net assets with donor restrictions and how the restrictions affect the use of those resources.
Net assets aren’t the only areas that require expanded disclosures. The new standard also requires enhanced disclosures for a variety of funds, including the following provisions from the FASB:
- The amounts and purposes of governing board-designated funds, appropriations, and similar actions.
- Underwater endowment funds are classified as a reduction to “with donor restrictions” assets and should include a spending policy and fair value of the endowment.
- Information on how a NFP manages liquid resources available to meet cash needs for general expenditures.
- Quantitative and additional qualitative information on the availability of financial assets, which can be affected by its nature, external limits, and internal limits.
- Amounts of expenses by both their natural classification and their functional classification. That analysis of expenses is to be provided in one location, which could be on the face of the statement of activities, as a separate statement, or in notes to financial statements.
- A list of methods used to allocate costs among functions.
These disclosures are done mainly to benefit donors. Additional details will make the financials more user friendly and allow donors to gain a better understanding of the organization. These details can also help NFP board members understand where their organization stands.
Functional Statement of Expenses
Thanks to the new accounting standard, NFPs will be required to have a functional statement of expenses starting next year. This means each organization will need to put together a detailed statement covering program expenses, management expenses, and fundraising expenses, as well as the nature or type of each expense.
Updates to Cash Flow Statements
The new standard also makes changes that may encourage more NFPs to use the direct method to report cash flow statements. Due to the changes in the new update, organizations that report via direct method won’t be required to complete a reconciliation under the indirect method.
How the New Accounting Standard Can Help NFPs
While the FASB update means that NFPs have a lot more accounting work to do for next year, it can actually be a good change for many organizations. This is because the new standard will force NFPs to take a closer look at what their numbers are and what they actually mean.
With ongoing changes in funding and funding streams, more NFPs are wondering how they can become more sustainable as an organization. The FASB update forces NFP personnel to look at overall liquidity, net asset details, and other key information that will help them gain a better understanding of how sustainable their organization actually is and how much of their cash is actually restricted. Not only will enhanced details help donors and board members, it can provide a greater understanding of an organizations actual assets and how they’re being used.
Of course, the impending challenge for NFPs is to implement these new processes for 2018 and after. Apple Growth Partners is an accounting and business advisory firm that can help your organization implement the new standard, ensuring that your functional expenses are in the right spots and improving your understanding of restrictions and net assets. Contact us today about helping your organization comply with the new NFP accounting standards.