For some, thinking about changes in financial reporting standards for nonprofit organizations can make sleepy summer days even sleepier; for the first time in twenty-four years, the Financial Accounting Standards Board (FASB) has released a major update to nonprofit accounting standards. These changes only technically apply to financial statements prepared in accordance to Generally Accepted Accounting Principles (GAAP)—typically your organization’s audited statements. However, in reality, use of the new standards will become a best practice, expected of all nonprofit organizations, as funders and other stakeholders request financials that comply with GAAP.
Here are three areas in the updates that board members should understand.
Net Asset Categories
On the statement of financial position (a.k.a., the balance sheet), you will now see two categories of net assets—without donor restrictions and with donor restrictions—rather than three: unrestricted, temporarily restricted, and permanently restricted. This does not mean that your board cannot continue to temporarily restrict funds for reserve or other purposes, but it does change how these funds are presented on the financial statements. Board designated restricted funds will now be included in the assets in the ‘without donor restrictions’ category. Grants for a specific program or purpose will be included in the ‘with donor restrictions’ category. The new format better communicates what assets are available for general operations and what assets have restricted use.
Liquidity and Availability of Funds
Related to the asset categories, the new standards require a footnote in the audited financial statements describing the funds available to meet the organization’s general expenses in the upcoming year. The note must explain how the organization manages its resources to cover its expenses. This means that the organization’s leadership must have a thorough understanding of what assets are readily available to use for general operations.
If your organization has board designated reserve funds, there should be clear policies describing how the board decides to set aside these funds and the circumstances and procedures for using the designated funds. For example, an organization may have a rainy day fund to use for capital improvement and repair. If the rainy day fund policy specifies that funds can only be used for facility expenses, these funds would not be available for the organization’s general expenditures. If, however, there is a general understanding that these funds could be used in a cash flow emergency to cover payroll and other general expenses, this should be explicitly stated in the rainy day fund policy, with a clear definition of what constitutes a cash flow emergency.
Even if your organization does not use audited statements, be prepared to address the liquidity question with funders and donors. From a quantitative perspective, financial statements should clearly indicate what funds are available to meet general expenses in the upcoming year. From a narrative perspective, the organization should be able to succinctly explain how the organization manages its available liquid resources and refer to any applicable policies.
The update requires that your organization report its expenses by function—e.g., programs, general and management, and fundraising—as well as the nature or the type of expense (rent, salary, etc.). This is similar to the information that your organization provides on its 990 form. Your organization can present functional expenses as part of its statement of financial activities (a.k.a., income statement), as a separate statement, or as a note within your financials. You must also include a description of the methods used to allocate expenses between your program and general categories.
Although the new standards are not effective until fiscal years beginning after December 15, 2017, talk to your accountant, your board treasurer, and financial staff to determine what changes, if any, will be necessary to comply with the new standards.
Thank you to David Little of CliftonLarsonAllen LLP, for his help in understanding these FASB changes.
A version of this post appeared in the Corridor Business Journal.