By Jennifer Coleman
Financial Statements may not be the most poignant documents produced by a nonprofit organization. Yet, they are critical and should communicate much about your organization. It’s worth noting that the Financial Accounting Standards Board (FASB) made some notable changes to nonprofit financial statements with their FASB Accounting Standard Update (ASU) No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities
Although the regulations were published a couple years ago, significant provisions described below go into effect for annual financial statements issued fiscal years beginning after December 15, 2017 and for interim periods within fiscal years beginning after December 15, 2018.
Net Asset Classifications
Not-for-profits should now combine temporarily restricted and permanently restricted net assets in a single classification of “net assets with donor restrictions.” Unrestricted net assets should now be reported as “net assets without donor restrictions.” These two categories are required in your financial report. Organizations can choose to break the assets down in more detail in the footnotes if not displayed on the face of the statement of financial position.
Another tweak is how the organization reports the restricted donor gifts used to acquire assets. Previously, the donor-restricted gifts for assets were released and recorded as net assets over the estimated useful life of the asset. The “placed in service approach” should now be used for reporting. For example, pledges toward a facility remodeling project would be released from a “net asset with donor restriction” to a “net asset without restriction” when the funds are disbursed during construction.
Self-imposed limits on a nonprofit’s asset must also be disclosed as a board-designated net asset. An asset that’s earmarked for a specific purpose by the governing board should be indicated as such in the face of the financial statement or its notes. Prior to preparing financial statements, you should identify all board-designated net assets and consider having the board un-designate any assets that are unnecessarily restricted.
New Statements of Functional Allocation
The new guidance requires analysis of expenses by function and by nature to be presented in one location in the financial statements, whether in the notes or in a separate financial statement. Examples of functional classifications are programs, fundraising, or management. Examples of natural classifications are salaries, rent, printing, postage and depreciation. Previously, only voluntary health and welfare organizations were required to include the statement of functional expenses.
It is likely to take organizations with multiple departments, employees and programs time to research employee time allocation and supporting expenses. Some organizations may find they need to revise how they track expenses and time to meet reporting requirements. You may have to take a hard look at some operations to determine how much time and expense should be considered direct supervision versus conduct of each program. Previous practices of labeling activities and expenses simply by their program description may need to be replaced or refined to make sure the natural classification is recorded, not just the program for which the cost or time was expended.
Liquidity and Available Resources
Nonprofits will now have to demonstrate how they manage liquid resources to meet cash needs for expenditures within one year of the financial statement. The information needs to be disclosed either in the statement of financial position or in the notes.
Nonprofits are likely to have to contend with restrictions on the liquidity and availability of resources when developing their statements. For example, long-term restricted resources like endowments and capital campaigns would have to be deducted or excluded from resources available to meet cash needs.
Organizations that don’t already have a cash management strategy to track and assess cash balances at least quarterly will need to develop one. You may need to employ liquidity ratios as a tool for tracking cash reserves and a more robust forecasting of revenues, expenses and capital expenditures.
Statement of Cash Flows
Previously, a nonprofit that chose to prepare their statement of cash flows using the direct method was required to present a reconciliation to the indirect method. Although the reconciliation may still be presented, the requirement has been eliminated.
The direct method details where cash comes from and where it goes. The indirect method starts with the change in net assets for a nonprofit and then adjust for noncash transactions and changes to statement of financial position operating accounts, such as accounts receivable and accounts payable.
If you are unsure how these revisions to FASB affect you and your nonprofit, please give our offices a call at 239-939-5775.
Jennifer Coleman, CPA, CFE is the assurance and quality control partner of Myers, Brettholtz & Company, PA. She is a member of the American Institute of Certified Public Accountants and the Florida Institute of Certified Public Accountants and is has received Certification in Fraud Examinations. .