The year 2018 marked the most significant changes to accounting for not-for-profit (NFP) organizations since the early 1990’s. These changes will only affect organizations that prepare their statements according to generally accepted accounting principles (GAAP). If your organization is not audited or does not follow GAAP, for example those that report on a cash basis, these new standards will not apply.
The new standards are contained in FASB Accounting Standards Update (ASU) 2016-14 and will be reflected on audit reports for calendar year 2018 reports and fiscal year reports for years ending during 2019. The goal of these reporting changes is to make statements more understandable and to make it easier to compare to other NFPs.
Net Asset Classes
Prior to this change net assets were classified as unrestricted, temporarily restricted and permanently restricted. For better clarity these classes have been changed to net assets without donor restrictions and net assets with donor restrictions. Although these changes will show up on your audit report, the IRS has not changed the classifications on the Form 990 for 2018. The prior classes caused confusion especially with the term unrestricted, which could have restrictions other than those imposed by donors.
The NFP Statement of Activities shows revenue and expenses for the organization. Under the new standards expenses are to be reported both by type and by function. Expense types include payroll, rent, printing, postage, etc. Function expense include program area such as membership, events, education, administration and other non-specific program expenses. Organizations can present them in the Statement of Activities or as a separate schedule. The footnotes to the audit report should discuss how the organization allocates expenses to the program areas.
Liquidity and Availability of Assets
As discussed, the term unrestricted net assets created the impression that all of those assets were available for use. The new standards require the disclosure of “qualitative” and “quantitative” information on how the organization manages its financial assets and the availability of funds for operations. Liquidity information should describe how the organization manages its funds disclosing cash and equivalents, investment and the availability of a line of credit. Availability disclosures should include assets to meet cash needs in the next year. Availability of assets can be affected by its nature, external limits imposed by donors, legal requirements and contracts, or limits imposed by the organization’s board. Expect that your auditor will review contracts and board minutes in great detail to meet this disclosure requirement.
Net Investment Return
In order to achieve comparability between NFP organizations the standards require showing investment returns net of expenses on the statement of activities. The expenses netted against the investment returns include external investment expenses and direct internal investment expenses. Internal expenses including payroll should only be for those involved in strategic and tactical activities, not activities such as accounting recording and reconciling accounts.
These changes are very extensive and generally are not a part of most organizations’ internal financial statements. If you have not already done so, now is the time to meet with your auditors and finance committee to discuss the impacts of ASU 2016-14.