Are Your Not-For-Profit Clients Ready for the New Accounting Standards?

Are Your Not-For-Profit Clients Ready for the New Accounting Standards?

Not-for-profit organizations should be gearing up for the biggest change to their financial statements in 25 years. Back in August 2016, FASB released ASU 2016-14 (Topic 958): Presentation of Financial Statements of Not-For-Profit Entities, with the intention of making it easier for users to understand the financial status of an organization and reduce some of the complexities of reporting. This new standard is effective for fiscal years starting after Dec. 15, 2017. That means for an organization with a June 30 year end, this standard takes effect for the year ending on June 30, 2019.

Let’s take a look at the biggest changes:

Net assets split into two categories. Under the old standard, net assets and the revenues associated with them were split into three categories: permanently restricted, temporarily restricted and unrestricted. Now, there will be only two categories: with donor restrictions and without donor restrictions, which should be easier for most users to understand. Organizations will still have to disclose the specifics of restrictions in the notes, including how and when resources can be used.

Advisors should be aware that organizations may inadvertently introduce donor restrictions if a fundraising appeal describes a particular program. Donors responding to that appeal may be donating with the intent that their donation will be used for that program. This can be addressed by adding checkboxes on donor forms to specify how donations should be used, and perhaps including one marked “please use this where it is most needed.”

Board restrictions of assets. Boards of not-for-profit organizations sometimes earmark cash or other resources for specific uses, such as liquidity reserves or for a specific future project. These restrictions on funds now need to be disclosed. This can be done either in the financials or as a disclosure in the notes. This type of restriction is different from donor restrictions, and the relevant resources will normally be grouped with the funds without donor restrictions.

Liquidity disclosures. One of the biggest changes is the requirement to explain with both numbers and words the resources an organization has available to meet current financial needs. Organizations need to explain in narrative form how liquidity will be managed in case of a cash crunch. For example, is there a line of credit that can be drawn on to meet short-term needs? This means your not-for-profit clients may need to develop a liquidity plan if they don’t already have something in place.

In addition, organizations need to quantify the amount of resources at the balance sheet date that is available to meet operating expenses over the next year. This includes cash in bank accounts that isn’t subject to donor restrictions and any receivables that the organization expects to collect on in the next year.

Expense allocation. Besides the natural descriptions of expenses, such as salaries or supplies, all organizations are now required to show how these expenses are allocated to the three functional categories of program services, management, and general and fundraising. This can be on the face of the financials, in a separate statement or in the notes. This requirement shouldn’t be too cumbersome since most organizations already have to do this for their 990 and for their audit.

Organizations must also describe their methodology for allocating expenses between functional categories. This may be a good opportunity for advisors to help their not-for-profit clients examine their current allocation methods and update them, if necessary. Expenses may need specific coding for programs, functions and natural expense categories. Fortunately, this is easy to do with class tracking using QuickBooks®.

Underwater endowments. If the current value of an endowment has dropped below the original gift amount, additional disclosures will be required to report the original gift amount, the current fair value and the aggregate amount that it is underwater.

Statement of cash flows. Organizations that present their statement of cash flows using the direct method no longer need to reconcile back to the indirect method. Either method can now be used for the statement of cash flows.

Overall, the changes to the standards should make it easier for users to understand the financial position of an organization, as well as simplify reporting for not-for-profit organizations. As mentioned above, these changes provide an excellent opportunity for advisors to check in with their not-for-profit clients and make sure that their accounting is in alignment with the new reporting requirements!