The Financial Accounting Standards Board is in the business of rulemaking, and there’s a new one nonprofits need to be aware of.
Back in 2016, FASB issued new guidance required for all nonprofit organizations with fiscal years ending after December 15, 2018. While the majority of the changes are purely cosmetic, understanding each will make your year-end financial reporting much easier.
The most obvious change that a reader of your 2018 financial statements will see is in the terms “restricted net assets.” The term “restricted” was seen as being confusing to many readers so FASB revised the historical references.
Now, unrestricted net assets will be referred to as “net assets without donor restrictions” and temporarily restricted and permanently restricted net assets will be combined as “net assets with donor restrictions.” While the new presentation is the minimum requirement, we strongly suggest you maintain your records with a segregation between temporarily and permanently restricted net assets to comply with the original donor’s intent.
One change related to the net asset presentation is related to board designations. Historically there was no requirement to disclose any board reserve with the exception of a formally adopted board designated endowment.
Under the new rule – known as 2016-14 – all board reserves, designations and other internal restrictions must be disclosed. While nothing has changed in regards to the board’s ability to change these restrictions, it does provide the opportunity (and responsibility) to present the board’s plan for the assets of the organization to financial statement reviewers.
Does your nonprofit organization intentionally maintain three months of your annual expenses as liquid cash? Now that amount and policy will be a required disclosure – within the net assets without donor restrictions category.
Under the prior standards, the minimum required presentation for expenses had to include the total program, fundraising and general and administrative expenses. Each of these is referred to as the “functional” presentation.
Under the new rule, the guidance greatly expands the minimum presentation requirements for an organization’s expenses. These rules require expenses to be presented under their “natural” classification including items such as wages, payroll taxes, rent, utilities, etc. Each of these natural classifications must then be allocated among the functional allocations detailed above.
Nonprofits have the option of presenting this information within their disclosures or in a separate schedule. However, this schedule cannot be presented as “supplementary” material.
The other important part of the expense presentation is the enhanced disclosure which explains how you have allocated those “natural” classifications of expenses among the functional programs. Is payroll allocated based on a time study of the employees work? Is rent and utilities allocated based on a square foot of your total office space?
Whatever the case may be, use this space to tell the readers of your financial statements how you are identifying the level of program expenses. As many donors don’t understand the need for general and administrative expenses – or how the payroll cost of your executive director is allocated 80% to program activities – any nonprofit will want to use this space to tell a better story and gain the attention of those scrupulous donors.
The last and most significant change under 2016-14 are two new liquidity disclosures – one quantitative, one qualitative. Obviously there are quantitative measures throughout your financial statements. As such, this disclosure will not be a dramatic addition.
The quantitative piece will be a summary of the liquid assets the nonprofit holds at the end of the fiscal year and which are available for expenditure in the next 12 months, or to support the next 12 months of expenses. This will include items such as cash available for expenditures (not restricted by a donor for long term purposes), accounts receivable and the expected distribution of the annual endowment. While a reader would intuitively compare this list to your total expenses of the current fiscal year, this comparison is not part of the disclosure.
The more significant piece of these changes is the qualitative disclosure. Historically, the only time a set of financial statements would include some qualitative measure was in the negative case of a going concern. In such a case management would need to discuss the plan to avoid going out of business and thus held a very negative context.
This new disclosure, however, can be presented in a way that highlights the nonprofit’s cash management plan and the smart ways in which it is managing its resources. A nonprofit will be able to explain what appears to be either an over or under abundance of liquid resources.
If liquid assets have been intentionally accumulated, tell this to your readers/donors and why you still need their donations despite these balances. If liquid assets are less than desirable, explain the situation which led to that balance and how management is being smart about future costs to limit any risk.
In either case, if liquid assets at the end of the fiscal year are at the point they are because of the seasonality of the organization, you can explain that. Whatever the case may be, use this space to support your organization and tell the readers all of the great ways you manage the organization and why they should support you.
Keep these changes in mind as you work on your 2018 financial statements. Use these changes to highlight and benefit your organization.
Should you have questions on how to implement the new guidance, contact us for best practices and any situations specific to your organization that can be presented in the next set of financial statements.
Concannon Miller has decades of experience providing accounting and audit services to nonprofit organizations. Our highly skilled advisors can provide valuable insight into protecting nonprofits from risks that could threaten their mission, recommendations on controls, and advice on basic accounting as well as providing efficient, courteous annual audit services. Contact us for more information.