Not-for-Profit? Learn How the Recent Accounting Standards Could Affect Your Organization

The giving cycle. Funding cuts. Grant applications. Today, many professionals responsible for the fiscal health of a not-for-profit are consumed with a variety of concerns that impact the bottom line. Adding to that, the recent Financial Accounting Standards Board (FASB) proposed changes are certainly concerns that cannot be overlooked.

According to the National Center for Charitable Statistics (NCCS), more than 1.5 million nonprofit organizations are registered in the U.S. This number includes public charities, private foundations, and other types of nonprofit organizations, including chambers of commerce, fraternal organizations and civic leagues. The concern?  The FASB changes will affect nearly all not-for-profit entities who issue financial statements.

FASB rules can be confusing. Let’s take a clear and simple look to better understand how information that is presented in the annual financial statement may have to be adjusted to ensure FASB compliance.

Overview
The impending FASB-proposed Accounting Standards Update (ASU) will create drastic changes to financial statements for Not-For-Profits.  While this update is currently in draft form, the FASB Not-for-Profit Advisory committee is currently evaluating the feedback submit on their exposure draft submit back in August.  Some of the more popular concerns about the coming changes include:

• The proposal creating differences between not-for-profit and for-profit financial statements
• The opportunity for inconsistency in the implementation of the proposed disclosure requirements

The four main provisions of this proposal include changes to the following:

Net Assets
Net assets would be presented in two columns instead of the current three:

1. Net Assets With Donor Restrictions (Includes the previous Temporarily and Permanently Restricted Net Assets Classifications)
2. Net Assets Without Donor Restrictions

The changes in both of these net asset types would be shown on the statement of activities.  The main reason for this change was the ability of boards to reduce a permanently restricted endowment when its investments fell below the original amount donated (underwater endowments).

Intermediate Measures of Operations
The changes in donor restrictions would show two subtotals:

1. Operating revenues, support, expenses, gains and losses that are without donor-imposed restrictions
2. Internal transfers from board designations that either place or remove self-imposed limits on the use of resources that make them either unavailable or available for the current-period operating activities

Investment income will be reported separately from operations, net of investment expenses.

Related read: Avoid Losing Your Tax Exempt Status

Cash Flows
Operating cash flows must now be shown with the direct cash flow method.  The following reclassifications were made to the operating section as well:

• Purchases of long-lived assets (moved from investing activities)
• Payments of interest moved out of operating and into financing activities
• Dividends and interest moved to investing activities

Enhanced Disclosures
Additional disclosures would be required for:

• Board designations of assets
• The composition of net assets with donor restrictions
• Management of liquidity, and availability of assets to meet near-term demands
• The Functional Expenses of the Organization can be reported in:
  • The Statement of Activities
  • A separate Statement of Functional Expenses
  • Footnotes
• The methods used to allocate costs across programs and support functions
• Underwater endowment funds

When will these changes take effect? As of this writing, FASB has not issued an effective date as they are still considering feedback.  However, we have found counseling our not-for-profit clients to ensure they are prepare has been effective to ensure understanding and provide a seamless integration.

Are you a not-for-profit with questions surrounding FASB or day-to-day operational concerns? As one of the leading CPA and management consultancy firms in Northeastern Ohio specializing in not-for-profit compliance, we are ready to have a conversation with you and ensure you financial position is solid. Contact me directly at cblankschaen@zinnerco.com or 216-831-0733 to learn more.