For the first time in more than 20 years, the Financial Accounting Standards Board (FASB) has issued a new accounting standard to enable not-for-profits to more effectively provide relevant information about their financial resources.
Issues with Former Accounting Standard for Not-for-Profits
In a statement, FASB officials emphasized that the former accounting standard for not-for-profits had held up well for more than two decades, but that there were various issues that needed reform. The most common complaints about the old standard as related by various stakeholders included:
- insufficient transparency in reporting of financial performance measures
- complexity in net asset classification
- clarity of information regarding liquidity and overall availability of cash
- challenges with the usability of certain aspects of the model, including expense reporting
The Goal of the New Rules
The FASB made some important changes to improve upon the current standard. In short, the FASB changed presentation and disclosure requirements in an effort to assist not-for-profits in providing more useful and relevant information about their financial resources and any changes in those resources. These changes will help not-for-profits more easily provide more salient information to all financial statement users including donors, grantors, and creditors.
Most Important Changes
The most important FASB mandatory changes to the financial statements of not-for-profits are outlined below:
- Decreases the number of net asset classes from three to two. The FASB eliminated the “temporarily restricted” net asset class and simplified and reorganized the net asset classes into “net assets with donor restrictions,” and “net assets without donor restrictions.”
- Requires organizations to report on the “underwater” (where market value is less than historical value) amounts of donor-restricted endowment funds in net assets and enhances disclosures about underwater endowments in general.
- Maintains the option for preparers of financial documents to choose between the direct and indirect methods when presenting operating cash flows. No reconciliation is required between the two methods.
- Requires organizations to provide qualitative information in the notes of their financial statements on their management of liquid available resources as well as liquidity risks.
- Requires organizations to provide quantitative information communicating the availability of financial assets to meet cash needs for general expenditures within one year of the balance sheet date. This information must be presented on the face of the financial statement or in the notes section.
- Requires extensive reporting of all expenses by function and nature. In addition, organizations must carry-out and provide an analysis of all expenses by both function and nature.
FASB officials say that these changes will help both not-for-profits and interested stakeholders by changing how net assets are presented in a more relevant way and by providing better information for assessing the liquidity of the not-for-profit organizations.
In addition, FASB officials stated that they would defer the recommendations to require the presentation of measured operating results by not-for-profits until Phase Two of their ongoing improvement project. Other changes still under deliberation will also be considered for implementation in this phase. No set timeframe for this phase has been determined.
Timeline
Not-for-Profits will have some time to adjust to these new accounting rules. The FASB stated that the new standard will first take effect for annual financial statements issued for fiscal years beginning after December 15, 2017. It will officially take effect for interim periods within fiscal years beginning after December 15, 2018. FASB encourages not-for-profits to voluntarily adopt these changes earlier than these mandatory dates.
More Information on New FASB Standards
For more information about the new FASB standard, please go to the American Institute of CPA’s (AICPA) website, which has a Not-for-Profit section at:
http://www.aicpa.org/interestareas/notforprofit/Pages/NFP.aspx
The AICPA will be offering a free webcast to its members and to others (for a fee) interested in this issue on Wednesday September 28 from 1-3 PM EST. The webcast is entitled Applying FASB’s New Not-for-Profit Financial Statement Standard.
For questions about the new FASB standard for Not-for-Profits and any IT-related issues, please contact Network Depot by calling, or sending us a message online.