In an effort to increase transparency and continuity in the preparation of financial statements, the Financial Accounting Standards Board (FASB) has proposed significant changes for nonprofits. In the past 20 years, generally accepted accounting practices (GAAP) have not clearly specified a way of reporting performance. That is all going to change. Nonprofits can be optimistic that these changes will have great benefits for them. They will allow nonprofit organizations to become more comparable, generating easier-to-interpret financial statements that will aid in the evaluation of financial statements for the purposes of obtaining stakeholders and loans.
Changes to net asset classification
The proposed Accounting Standard Update (ASU) changes the nonprofit accounting requirement for what information must be presented in the statement of financial position. The current three classes of net assets (unrestricted, temporarily restricted, and permanently restricted) will now be reduced to two classes of net assets (net assets with donor restrictions and net assets without donor restrictions). This change is intended to simplify financial reporting.
In addition, the FASB has revised how underwater donor restricted endowment funds are to be classified. They believe it is confusing to classify the spending from underwater endowments as unrestricted, and thus, the FASB has proposed that underwater amounts be classified in net assets with donor restrictions. The FASB is also now requiring disclosure of the combined amount of funds that are underwater and the original endowment amount, along with any rules or restrictions on spending from such funds.
Statement of activities
Along with the changes to net asset classification, a corresponding change to the statement of activities has been proposed. Now, all nonprofits are required to report income or losses from operating and non-operating activities separately. This is because certain non-operating activities, like investment earnings or losses, can affect the operating bottom line. The FASB believes this will help to clearly show both income and costs that are related to accomplishing the nonprofit’s mission.
Presentation of Cash Flow
Changes to the statement of cash flows have been proposed in order to provide more useful information to key stakeholders on the overall operating performance of the nonprofit. First, the board is proposing the use of the “direct method” of reporting cash flows from operating activities. The second change will realign the reporting of certain items to be consistent with how items in the statement of activities are being reported. Items such as operating, financing, and investing categories will be affected. The FASB believes these changes will result in easier-to-read financial statements which will prove to be more useful for the average user of financial statements.
Assessment of liquidity
The FASB has also proposed changes they hope will result in a clearer picture to stakeholders of an organization’s liquidity. Donor-imposed restrictions and confusion about how they affect the availability of assets have caused a lack of clarity regarding the assessment of liquidity. The proposal requires both qualitative and quantitative information regarding the liquidity of assets and cash demands as of the reporting date. Along with the changes to net assets, classification of this information should allow users to assess the liquidity risk of the nonprofit.
Impacts
As with any change, an investment of time for nonprofits and their accountants will be necessary to implement the required changes. The FASB’s proposal will allow stakeholders to better examine financial performance as well as the need for funding and overall stewardship of donor funds. In the end, the nonprofit should experience significant benefits from the extra work as better information is provided to decision makers
At Beck and Company Certified Public Accountants and Business Advisors, we would love to be of service to you as you consider implementing these required changes for your organization. We are a certified public accounting firm serving the Greater Washington D. C. metropolitan area with clients also along the Eastern Seaboard. Our firm has been built upon a tradition of service, technical expertise, and creative thinking. Our services are highly personalized, cost effective, accurate, and dependable. Our commitment to excellence is demonstrated in our team’s understanding of your business and personal financial objectives and then delivering innovative solutions to achieve them.
Contact us today and allow us to help you achieve your financial goals.