The Financial Accounting Standards Board, or FASB, recently issued new guidance for how financial statements for nonprofit organizations should be presented. The new requirements will take effect for fiscal years starting after December 15, 2017, and for interim periods within fiscal years starting after December 15, 2018. The goal of the changes is to make financial statements clearer and easier for donors, grantors, creditors, and others to understand, and for statements from different organizations to be more consistent, as current practices allow for some variability in how information is presented.
In a series of blog posts, I will be going into more detail about the upcoming changes and how they differ from current practice. By way of introduction, I’ll present here an overview of some of the larger updates you can anticipate.
- Net assets are currently presented in 3 categories – unrestricted, temporarily restricted, and permanently restricted. Going forward, there will only be 2 categories – net assets with donor restrictions, and net assets without donor restrictions. This will impact the balance sheet, as well as the statement of activities, where the changes in each class of net assets are presented.
- The statement of cash flows may still be presented using either the direct or indirect method. If you use the direct method, a reconciliation to the indirect method is not longer required.
- Return on investments will be reported net of investment expenses, rather than disclosing the expenses separately.
- Absent stipulations from donors, long-lived assets, as well as donations of cash or other assets to be used to acquire long-term assets, will be reported under the placed-in-service approach. The restrictions on them will be released (moved from net assets with donor restrictions, to NA without donor restrictions) when the asset is put into service. The current option to release the restriction over the life of the asset will be eliminated.
- There will be more quantitative and qualitative disclosures on the face of financial statements and in the notes to them. A few topics for disclosures include: (Part 1|Part 2)
- Amounts and purposes of assets designated by your governing board for specific uses, and other self-imposed limits on the use of resources without donor-imposed restrictions.
- Details about net assets with donor restrictions and the impact on how resources can be used.
- Qualitative and quantitative information about the availability of financial assets as of the balance sheet date to cover cash needs for general expenses in the coming year.
- Qualitative information about how your organization manages liquid assets available for immediate needs for general expenses within one year of the balance sheet date.
- Classifying expenses both by functional classification and by natural classification. This analysis must be in one location, whether as part of the statement of activities, in another statement, or in the notes to the financial statements.
- Methods you use to allocate costs between program and support functions.
- Information about underwater endowment funds, including the aggregate fair value of these funds; the aggregate of the original gift amounts, or the amount the donor or the law requires you to maintain; the aggregate amount by which funds are underwater, which are classified under net assets with donor restrictions; and your organization’s policy, and actions you took during the reporting period, concerning appropriation from underwater endowment funds.
In coming weeks, I’ll go into more depth about each of these topics. If you have an auditor or external accountant/bookkeeper that you work with, I encourage you to discuss with him or her how the changes will impact your specific organization and how you present financial information.