If you are in the non-profit or accounting space, you probably already know that the financial reporting requirements are about to change for non-profits. The question is, are you ready? When the Financial Accounting Standards Board (FASB) issued ASU 2016-14 they allowed about two years to prepare for the changes before requiring non-profits to adopt it. The time is upon us now to implement these changes so if you haven’t been paying attention, here is what you need to know.
First, this standard applies to non-profit organizations preparing financial statements under generally accepted accounting principles (GAAP), for years beginning with the 2018 calendar year or 2019 fiscal year. This includes compilations, reviews, and audits of non-profit financial statements under GAAP, but would not apply to financial statements prepared using any other financial reporting framework, such as cash basis. The underlying purpose for all of the changes in this standard is to make the financial statements more understandable to the public and to enable each organization to tell its story better.
Second, although there are many details within the financial statements that will be affected, the changes really boil down to 5 key items:
- Net asset classifications
- Liquidity disclosures
- Functional and natural expense classification
- Investment expenses, and
- Statement of cash flows presentation.
While that might seem like a lot, some organizations are already in compliance with the new standard in most of these areas and will require very little change. Let’s talk about the three biggest changes to tackle now.
Net asset classification is the most obvious change you will note when looking at financial statements under the new standards. You may be familiar with the term “restricted net assets” which has been used for a long time in the non-profit world and refers to funds that donors have given to an organization, but restricted for a certain purpose. In the past, we have had these net assets split into temporarily restricted (for things like a special project or a pledge to be paid next year) and permanently restricted (for an endowment where only the income on the gift may be spent), but these terms were confusing to a lot of people. The new terminology for both of these restricted classes will be “with donor restriction” to clarify that it is the donor, not the organization’s management or Board of Directors, who has the ability to restrict donations. Funds previously classified as unrestricted will now be classified as “without donor restriction.” This is mostly a change in terminology and presentation, and doesn’t really change the accounting for these funds.
The next biggest change is the requirement of a statement of functional expenses, which presents all of the expenses by line item (such as rent, salaries, travel) as well as across the organization’s programs and administrative costs, usually in a matrix format. In the past, this was only required for certain types of non-profit organizations and was optional for all others. Accordingly, many non-profits are already presenting this statement, so there will be very little change for those organizations, aside from providing a little bit more information in the footnotes. Organizations that are not currently presenting this statement will need to be able to gather information about their costs and what programs each cost benefits in order to allocate the various expenses accordingly.
Finally, there is now a requirement to present information about the organization’s liquidity. This is entirely new, and it is a great opportunity for the organization to tell its story better. The requirement is to provide both a numerical calculation of the assets that may be used to meet the organization’s operational needs within the next year, as well as a narrative to accompany the numbers. Grant organizations consider a variety of factors when deciding to which non-profits to make grants, and sometimes the financial statements don’t fully explain the situation. With this disclosure, organizations will be better able to explain why they are deserving and in need of grant funds.
Intimidating though these changes might seem, they are certainly manageable if you are prepared. If you haven’t started thinking about these changes yet, there is no time like the present to get started!