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January 23, 2017 Experts Corner

FASB releases major update to not-for-profit reporting

Katrina Olson

Last August, the Financial Accounting Standards Board (FASB) released the most significant overhaul of not-for-profit accounting and reporting in more than 20 years.

These financial reporting changes were first proposed by FASB in April 2015. After soliciting feedback on the proposal from nonprofits and their CPAs, the more controversial changes were tabled for further research, and the focus moved to primarily presentation matters.

Nonprofits must be in compliance with the new rules for fiscal years beginning in 2018, however early adoption is permitted.

The new standard aims to reduce complexities in reporting of net assets, as well as provide more useful information regarding a nonprofit's liquidity, financial performance and cash flows. Nonprofits across the United States that present financial statements in accordance with generally accepted accounting principles (GAAP) will be impacted by the changes, including charities, healthcare providers, cultural institutions, colleges and universities and foundations.

The release of this new financial reporting standard is a culmination of many years of groundwork, beginning in late 2009 when FASB formed the Not-for-Profit Advisory Committee (NAC). The formation of NAC was an answer to concerns repeatedly raised by stakeholders regarding complexities and inconsistencies within the nonprofit reporting model.

FASB, located in Norwalk, serves as the standard-setting body that promulgates accounting principles generally accepted in the United States of America.

According to FASB Chairman Russell Golden, “The new guidance simplifies and improves the face of the financial statements and enhances the disclosures in the notes, which will enable not-for-profits to better communicate their financial performance and condition to their stakeholders, while also reducing certain costs and complexities in preparing their financial statements.”

Some of the key provisions include:

• Net assets classification — The former designations of unrestricted, temporarily restricted, and permanently restricted have been eliminated. Going forward, net assets will be classified into two simple categories: (1) net assets with donor restrictions and (2) net assets without donor restrictions. Footnote disclosures will still be required that provide additional information about the nature and amounts of donor-imposed or board-designated restrictions.

• Liquidity — Disclose availability of resources to meet cash needs for general expenditures covering the upcoming fiscal year. Availability is affected by factors such as restrictions or limits established by donors, grantors, laws or the governing board.

• Cost allocation — Disclose how the organization allocates costs amongst programs versus supporting functions.

• Underwater endowment funds — In cases where the market value of donor restricted endowment funds is less than the original amount of the gift, the amount of deficiency must be disclosed. These enhanced disclosures will provide greater transparency for situations where the endowment's principal asset has been invaded by either expenditure or loss of market value.

• Contributions restricted for capital projects — In the past, donations restricted for capital projects could be released from restriction over the useful life of the asset (to match depreciation expense). This option has been eliminated. Going forward any contributions restricted for capital projects will be released from restriction once the project is placed in service.

• Functional expenses — In the past, only voluntary health and welfare organizations were required to present a statement of functional expenses. Under the new rule, all nonprofits are required to report expenses by both nature and function.

• Statement of cash flows — Nonprofits now have a choice whether to report operating cash flows using the direct method or indirect method. Previously only the indirect method was allowed, which is the methodology also used by for-profit entities. Arguably the direct method provides a clearer presentation of cash receipts from key revenue sources as well as disbursements to vendors versus employees.

Financial reporting changes take time and effort to implement. Organizations will need to review their financial processes to ensure the required information is being captured, as it is likely that modifications to the accounting information system will be needed to comply with the new reporting requirements. Management should also take into consideration the potential impact of certain new disclosures in evaluating the financial health of your organization by donors, grantors, bankers, and other users of the financial statements.

It is critical that both management and boards of directors start now to become educated in the new standards and begin the process of implementing the new rules. This will ensure that when 2018 rolls around, nonprofits will be prepared.

Katrina Olson is an audit manager with Whittlesey & Hadley P.C.

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