Savvy donors, grantors, creditors and other constituents have compassion for executive directors and development directors who work tirelessly to secure resources to advance their organizations’ missions. They appreciate the skill required to offer high-quality programs on razor-thin budgets. At the same time, they want tangible evidence that the not-for-profits they support have the ability to meet their financial obligations and use their funds wisely.
New FASB standards increase transparency in the financial statements by presenting a more thorough understanding of fiscal health, liquidity and spending. They require nonprofits to clarify the composition of their net assets, demonstrate their capacity to fund operations and supply a more consistent means to report expenses by function and nature. These guidelines must be adopted for fiscal years after December 15, 2017 but may be implemented early. Advanced preparation provides the pathway to success.
The new standard strives to address confusion surrounding the three current classes of net assets: unrestricted, temporarily restricted and permanently restricted. It makes two distinctions: assets without donor restriction and assets with donor restriction.
Assets without donor restriction include unrestricted funds plus board-designated assets that could be made available to support general operating expenses at the board’s discretion. Assets with donor restriction include resources subject to expenditure for a specific purpose, the passage of time, spending policy and appropriation, appropriation and expenditure when a specific event occurs and/or being held in perpetuity (i.e., permanently restricted).
The disclosure must specify how and when resources can be used as well as changes from the prior reporting period.
Questions to consider as you implement this change to asset classification:
- How much detail do you plan to present?
- Do you need to adjust your general ledger to track new categories?
- Will you provide the requisite information on the face of statements or in the notes?
- Do you have a mechanism to track the release of donor-imposed restrictions?
Liquidity and Availability
Notes to the financial statements must summarize the nonprofit’s policies for managing liquid assets and meeting cash needs for the forthcoming year. This disclosure also describes the availability of assets as of the date of the balance sheet to meet cash needs for general expenses in the coming year. Resource availability may be constrained by the nature of the asset, contractual agreement, donor stipulations or board designation. The amount and nature of liquidity reserves and other emergency funds to meet unforeseen liquidity needs (e.g., lines of credit) should also be provided.
The nonprofit’s liquidity management plan will depend on its sophistication and size, the type and complexity of its activities and its specific liquidity risks, among other factors.
Questions to consider as you implement this change to liquidity and availability:
- Do you have a board-approved policy for managing liquidity?
- Can you identify all financial assets and any limitation on availability for the next 12 months?
- What do you need to disclose to meet the requirements while providing the proper narrative about your fiscal health to third parties?
Functional Expense Reporting
Each not-for-profit must present an analysis of its expenses by function and nature in a single location (e.g., statement of activities, notes, or separate statement). It must also include a description of the methods used to allocate costs between program and support, such as management, fundraising, finance and accounting, investment management, human resources and information technology.
Questions to consider as you implement this change to functional expense reporting:
- What programs should be reported separately?
- Do you have a formal allocation methodology for allocating expenses?
- Are employees allocating time correctly based on the guidelines?
Learn more about functional expense reporting under the new FASB guidance.
The foregoing provisions (and others) must be instituted in the year of adoption.
In the year of transition, each organization must decide if they will have a one-year presentation or comparative. If comparative statements are needed, then adjustments will affect the current and preceding years, although you may opt out of presenting comparative functional expenses and liquidity disclosures. You will also disclose the nature of your reclassifications, restatements and the effects on net assets.
Early adopters warn that implementation takes longer than anticipated. If you have not done so already, think about the training and education you’ll need to get your accounting team and board members up to speed. Identify areas in which policies need to be developed and approved by the board. Take a hard look at your current financial reporting methods to define necessary changes and assign responsibility accordingly. Consider working with your audit firm to design your forthcoming disclosures so you’ll be clear on the information you need to collect. Also be sure to consider the timing and impact of the annual audit.
By developing your implementation plan early, you’ll be in the best position to meet the deadline as painlessly as possible.
Meet the Author
Bobby LaCour, CPA
Aldrich CPAs + Advisors
Bobby joined Aldrich in 2005 and has over ten years of experience in public accounting. He specializes in providing attest and accounting services to nonprofit, manufacturing and other private middle-market entities. He also has extensive experience with internal control and operations analysis. Balboa Park Online Collaborative audit committee member American Society of Certified Public Accountants member…
- Nonprofit organizations
- Public sector
- Government entities
- Foundations and associations
- Certified Public Accountant