Accounting Changes For Not-for-Profit Entites
The Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2016-14, Not-for-Profit Entities (Topic 958), Presentation of Financial Statements for Not-for-Profit Entities. We will provide a complete copy of the Update upon request. The changes may affect your financial statements as early as 2018, and you may or may not need to make changes in your day-to-day accounting practices, but we want you to be prepared.
These changes are intended to enhance the information about your organization’s finances so that potential donors, grantors, and financial institutions will have a better understanding of your overall financial condition, including performance, cash flows, and liquidity. Your financial statements provide your organization with the opportunity to tell your financial story, to share your strategy for managing financial resources with donors, grantors, creditors, and other stakeholders. If your organization is dependent on fund-raising, the more transparent your non-profit is, the more likely you will be successful with your fund-raising efforts.
In summary, provisions of ASU 2016-14 fall into two main categories as follows:
Restricted Assets – This new requirement seeks to classify funds “with donor restrictions” versus those “without donor restrictions,” avoiding any reference to timing, temporary or permanent. Previously, restricted assets were classified as temporarily restricted or permanently restricted. Note, these designations are the donor’s, not the organization’s. You may choose to further designate assets if the board designates assets for a particular purpose, but only the two categories are required. See mention of “board designations” in reference to liquidity.
This will require due diligence in properly recording receipts upon which the donor places restrictions, as well as accurately recording when and how restricted assets are released.
Expense Analysis – Most financial statements already provide a table and/or footnote allocating expenses for program, fundraising, and administration. This detail helps to tell your story and provides insight into how your organization uses its resources.
This requires paying attention to employee’s time allocated to the various functions. Reasonable estimates, versus actual time recording, are sufficient, but will need to be consistent and justifiable. The method by which the percentages are determined will need to be defined.
Statement of Cash Flows – We generally prepare the statement of cash flows for our clients so this may not present a change from how you currently provide us with your financial information, but the Update allows for the option of using either the direct or indirect method. The majority of businesses report cash with the indirect method, starting with net income.
This may not require any change in your day-to-day current accounting procedures, but might prove helpful to your Board and/or Finance Committee.
ENHANCED FOOTNOTE DISCLOSURES
In addition to obtaining your basic financial data, we will need to gather information regarding your policies and procedures in order to comply with the disclosure statement requirements.
Liquidity – It is important for management and the Board to regularly monitor your availability of resources required to fund operating needs and contractual obligations, and be prepared to report funds restricted by donors as well as board-designated reserves. Consider creating a Board Designated Funds Policy if one does not already exist wherein the Board may place self-imposed restrictions on the use of certain funds. Be explicit about your access to cash. What are your policies regarding cash reserves? Do you have an established line of credit, just in case? Do you have reserves sufficient to pay your bills? For how long?
The Update will require additional footnote disclosures in your financial statements, but might not require you to make any changes in your day-to-day accounting practices. Qualitative, as well as quantitative information, will help to provide a complete picture of how your organization is positioned to meet its cash needs.
Endowments – If the value of your endowment drops below the initial value, your financial statement footnotes must address not only the amount of the decrease, but also what you are doing to make up the shortfall. With more context in the footnotes, your supporters can assess how you are managing adversities.
This may require your Board and/or Finance Committee to establish a policy that confirms your organization’s intention to safeguard endowment funds.
We present these changes to you so that you can make any necessary changes in your 2018 fiscal year accounting practices. We will continue to keep you apprised of changes in accounting regulations, and we will assist you in the preparation of your annual financial statements to comply with the Accounting Standards Update.
Please contact your audit representative here at Earney & Company with any questions, or if you need assistance in making changes in your accounting systems.