In the past few years, the Financial Accounting Standards Board released several new standards that affect nonprofit entities. A few of them are large and in-charge, and effective for fiscal year-ends in 2018 and 2019. Here we’ll discuss briefly the first standard that’s come due, ASU 2016-14, Presentation of Financial Statements of Not-for-Profit Entities. This new standard affects substantially all non-profit entities. It’s purpose is to improve GAAP (generally accepted accounting principles) reporting and provide better information to donors, grantors, creditors, etc.
So what are the major changes? Starting with fiscal years beginning after December 15, 2017 (FYE’s beginning 1/1/18 and 7/1/18), non-profit entities must implement the following new areas of financial reporting:
Net Asset Classification
Previously, non-profit financial statements were broken down into three main classes: Unrestricted, Temporarily restricted, and Permanently restricted. The new standard changes the classes from 3 to 2, and changes the names to ‘Without Donor Restrictions’ and ‘With Donor Restrictions.’ In effect, Unrestricted => Without donor restrictions, and Temporarily + Permanently restricted => With donor restrictions. You’ll still need to track any timing or use restrictions, but this new model helps to make the classes easier to understand for those not familiar with NFP financials.
Information about liquidity and availability of resources
This new standard really emphasizes “telling your own story.” Part of the story you get to tell the readers of your financial statements relates to liquidity (the extent to which your organization has the cash to meet short-term obligations). Specifically, the standard requires the following:
- Qualitative information that communicates how your organization manages its resources to be able to meet cash needs for general expenditures within the next year. Basically, tell everyone how you make sure there’s enough cash in the bank to keep the lights on and your programs running. Do you have an investment account or other savings vehicle that is set aside for emergencies? Do you use a line of credit to smooth out the timing of when your largest expenses occur and your largest contributions come in the door?
- Quantitative information that communicates the availability of financial assets at year-end to meet cash needs for general expenditures within the next year. This is just quick math showing which assets you have at year-end that can be used to pay for expenses in the short-term (like checking accounts and CD’s), and which assets cannot be used (like endowments and fixed assets).
Information about expenses
Under the new standard, all non-profits are required to report expenditures by both Nature and Function and disclose the methods used to allocate expenses among functions. Let’s break this one down a little more:
- Nature vs. Function – An expense’s nature is what we think of as its line item (salaries, supplies, professional fees, depreciation, etc.); whereas, its function is the overall area of the organization the expense belongs to (program, fundraising, G&A, etc.).
- Method of allocation – To prepare a functional expense matrix/analysis you’ll need to allocate expenses among the different functions, and you’ll need to disclose how you allocated them. Was it by square footage, time studies, head count, direct cost, etc?
- Reported in one of three places – 1) On the income statement, 2) In the footnotes, or 3) Its own separate statement. This can no longer be a schedule after the footnotes, but has to be within the financial statements.
If you’re worried about implementing the new standard, here’s a couple of ideas to get you started:
- Keep tracking gifts as if the 3 class system didn’t change – you’ll still need to monitor any time and use restrictions, and keep separate tracking for endowments. If your GL system is already configured for UR, TR, and PR, leave it be and keep using it for now. You can revamp the GL with the next technology change.
- Start thinking of what you’d write in your liquidity narrative. Even if you just list out points to include in the note, it’ll be easier to change those points to narrative than not having any idea what to write at all.
- Start breaking down your expenses. If you haven’t used the GL system throughout 2018 to help you allocate expenses by function, that’s ok! Go back through each major expense by nature and think about what makes sense to use as an allocation. You can use different methods for different expenses. Salaries might be allocated by time study while maintenance expense is allocated by square footage of the buildings. And, tip for 2019, update your recurring expenses to already be broken down by function. Then, at year-end you’ll only need to run a report to get the numbers for the financials. 🙂
If you have any questions about how this new standard will impact your organization or questions on implementation of the standard, please feel free to email me at email@example.com. And, if you’re local, request a coffee meet-up to chat a little more. First cup is on us!