A Look at the Changing FASB Nonprofit Accounting Principles

Whether or not your organization needs nonprofit accounting audit services depends on several factors. Funding sources may require audits to continue providing capital. Other requirements may come from local, state, and federal offices guiding your nonprofit’s activities.  The National Council of Nonprofit’s Audit Guide offers helpful guidelines to nonprofits considering audit services.

Nonprofit audits aren’t just an item on your to-do list. They can provide an important service to an organization and help it tell it mission and story through financial analysis to the public and funding organizations. Properly prepared nonprofit audits satisfy both regulators and the public by offering insight into how a nonprofit obtains its funds and allocates them throughout the year.

It’s important to take a look at nonprofit accounting audit services now in light of the coming FASB changes to nonprofit accounting principles. These changes impact restricted and unrestricted net assets, liquidity disclosures, and functional expenses. Understanding the changes and using them to tell your nonprofit story can benefit your organization in many ways.

Restricted and Unrestricted Net Assets

Terminology around net asset categories has been changed. There are now two categories rather than three. The two categories are net assets “without donor restriction” and net assets “with donor restriction.”

One of the reasons why you might wish to hire Beck for nonprofit accounting audit services is this change in net asset categories and ensuring clarity around how monies are accounted for in your organization. Nonprofit accounting can be complicated, especially with restricted and unrestricted net assets. As you know, a donor can place any type of restriction they wish around their donation, making it challenging to categorize them.

For example, you might operate three programs with specific goals. Donors can give to one, two or all three programs with the stipulation that funds are used only to achieve the goals of each program. Another donor may give money that can be used for the operating budget but under the condition that the goals of program one are met. Do you see how this can get complicated very quickly?

Ensuring clarity around determining whether net assets are restricted or unrestricted is vital for telling the financial ‘story’ in your audit. Those interested in supporting your nonprofit want to know how, where and why they should give their hard-earned cash. By understanding where there are needs and how those needs are met through viewing the net asset categories, potential donors can get a better idea of how funds are being used and accounted for at your nonprofit.

Liquidity Disclosures

Liquidity is a term frequently misunderstood by those outside of the accounting and finance professions. Liquidity refers to cash on hand. Your organization may show a positive bottom line and positive net assets but lack liquidity because its assets are tied up in restricted categories, tangible assets, or other obligations.

Nonprofits often show when they accrue revenues but this doesn’t necessarily mean that the money is in the bank. Grants, for example, may be logged into your accounting system when notification is received that you have been given the grant. The actual check for the amount of the grant may not arrive for weeks or months and may push the grant funds into the next fiscal year. This is an example of how discrepancies arise between cash flow and assets.

This is why tracking actual liquidity is so important. The new FASB standards request that nonprofits list both quantitative and qualitative measures of liquidity. This encompasses both the financial resources available for the next year and methods by which the nonprofit manages and monitors liquidity. To satisfy the new FASB standards, you’ll need to disclose the resources on hand that can be used to cover all expenses and obligations in the next year.

Presentation of Expenses

The changes to the presentation of expenses aren’t extensive. Nonprofits must now break out their expenses into three functional areas. This isn’t news to those nonprofits who have always been subject to audits, but others may find the change a bit of a surprise. Nonprofit accounting audit services can help you figure this part of expense presentation out or you can follow the guidelines developed by FASB regarding expense presentation. Think of the nature of expenses as if they were line items and you’ve got the gist of it.

Nonprofit Accounting Audit Services from Beck & Company

These are the basics of the FASB changes and how they may impact many nonprofits. For specific information on how your nonprofit may be affected, consider a call to Beck & Company. Beck & Company offers nonprofit accounting audit services. We are Washington DC nonprofit advisors serving the eastern seaboard with advice and guidance for nonprofits. Contact us or call 703-834-0776 x8001.