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A PROGRAM OF THE U.S. CHAMBER OF COMMERCE FOUNDATION
 

IOM Blog

February 13, 2019

2018 – A Year of Financial Reporting Changes

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.

Expense Reporting

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.

      
Avatar photo
Bob Foulks, IOM, CAE, CPA, CGMA

Bob has more than 30 years of not-for profit management experience with two associations, the Wisconsin Medical Society (Society) and the Wisconsin Automobile and Truck Dealers Association (WATDA). The Society is a 501(c)(6) with over twelve thousand members. The Society also has a 501(c)(3) foundation and several for profit corporations including a large insurance agency and captive insurance company reinsuring business produced by their agency. The WATDA group of companies included a 501(c)(3), a 501(c)(6), a 501(c)(9) and two for profit subsidiaries. Prior to his move to association management he had positions in retail and insurance accounting.
Bob is a graduate of the University of Wisconsin and is a CPA and CAE (Retired). He completed the Northeast Institute for Organization Management and is a past member of the US Chamber Foundation’s Institute Board of Trustees and is on the Institute Faculty. Bob is a member of American Institute of CPA’s Not-for-Profit Section and the Wisconsin Institute of CPAs.
In 2012 Bob was awarded the Visionary Award from the Wisconsin Society of Association Executives to recognize his outstanding commitment to the association community by providing learning and knowledge building opportunities for members and the profession.
Twitter: @bfoulksjr
LinkedIn: www.linkedin.com/in/bobfoulks

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