What You Need to Know – The Basics
Do you read in the news that fraud has occurred at another nonprofit? Do you wonder if this could happen to you? The #1 Risk for all nonprofits cannot be found on your financial statements – it’s your reputation! You can do everything right by providing the most needed services, having great fundraisers, developing incredible donors, and receiving valuable grants, but one mistake by someone on your staff, board, or team of volunteers can damage the reputation of your nonprofit, causing a negative domino effect.
After almost twenty-five years, change has come to the financial statements for nonprofit organizations! The Financial Accounting Standards Board has issued ASU 2016-14, Not-for-Profit Entities (Topic 958) – Presentation of Financial Statements of Not-for-Profit Entities, for annual financial statements issued for fiscal years beginning after December 15, 2017. The goal of these changes is to improve the information in nonprofit financial statements, so nonprofits can better tell their story to donors, grantors, creditors, and other users of the financial statements.
The following basic information will give you a glimpse of the five areas where simplification on the face of the financial statements and enhancement in the note disclosures will accomplish these goals.
Five primary areas of change to the nonprofit financial statements:
- Simplify net asset classifications
- Transparency in reporting of financial performance measures
- Consistency in reporting expenses by function and nature
- Utility of the statement of cash flows
- Clarity of information regarding liquidity and availability of cash
Net Asset Classification
Prior guidance: Contributions to the nonprofit are classified into three categories: unrestricted, temporarily restricted, and permanently restricted.
Current guidance: Contributions are classified into two categories: “without donor restriction” and “with donor restriction”. Any underwater endowment funds are reported as “with donor restriction”. The financial statements must also disclose details of any board designated net assets, or any other self-imposed restrictions, if applicable.
Financial Performance Measures – Investment Return
Prior guidance: Investment expenses on statement of activities are either netted against investment return, or presented as a component of expenses in the financial statements. Disclosure of investment income, gains and losses (realized and unrealized), and any investment expenses is required.
Current guidance: Required to report all external and direct internal investment expenses NETTED against investment return on the statement of activities.
Consistency in reporting expenses by function and nature
Prior guidance: Only certain nonprofit organizations are required to disclose expenses by functional and natural classifications (program, management and general, fundraising).
Current guidance: Now required to report expenses by both functional and natural classification. Can report either as a statement prior to the footnotes, or as a footnote disclosure. The statement can no longer be a supplemental schedule to the financial statements. In addition, required to provide a written description of the methods used to allocate expenses.
Utility of the statement of cash flows
Prior guidance: Required to present an indirect reconciliation if the direct method is presented for the statement of cash flows.
Current guidance: Can choose between the direct method and the indirect method of presenting the statement of cash flows. No indirect reconciliation required, if the direct method used.
Clarity of information regarding liquidity and availability of cash
Prior guidance: No requirement to report or disclose the liquidity and availability of cash one year from the balance sheet date.
Current guidance: New guidance requires both qualitative and quantitative financial statement reporting and/or disclosures as to the liquidity and availability of cash:
- Qualitative information – Communicates how the nonprofit manages its liquid resources available to meet cash needs for general expenditures within one year of the balance sheet date.
- Quantitative information – Communicates the availability of the NFP’s financial asset to meet cash needs of general expenditures within one year of the balance sheet date.
Remember availability of financial assets may be affected by:
- Their nature
- External limits imposed by donors, laws, and contracts with others
- Internal limits imposed by governing board decisions
Additional items to note:
- The IRS has not yet updated the Form 990 to reflect these financial statement changes.
- The new standards provide flexibility as to where and how the new information is presented in the financial statements.
Please contact our Not-For-Profit Niche Team for more information.