In August, the Financial Accounting Standards Board issued new guidance concerning financial statement reporting rules for nonprofit organizations, the most significant changes since 1993.
These new standards are intended to improve the existing financial statement requirements by improving the reporting of net asset classifications and provide enhanced performance and liquidity information. Here is a quick summary of the areas impacted:
Net Asset Classifications
Nonprofit organizations should be reporting their Net Assets in three categories: Unrestricted, Temporarily Restricted and Permanently Restricted. These categories are often confusing for the average donor and thus require additional explanation. The new standards call for two Net Asset Classifications: Without Donor Restrictions (previously Unrestricted) and With Donor Restrictions (previously Temporarily and Permanently Restricted).
Your organization can still keep the breakdown that you are familiar with - Temporarily and Permanently Restricted - by adding this in the notes section of your financial statement or keeping these categories listed under their new heading on the financial statements.
Statement of Cash Flow
The Statement of Cash Flow is probably the least used report by nonprofit organizations on a monthly basis. If you are not seeing this as a part of your monthly financials, you do see it in your audited financial statements. The Statement of Cash Flows is used to show the inflow of cash (cash receipts that come from operating, financing and investing activities) and the outflow of cash (cash payments for operating, financing and investing activities). Ultimately this statement reveals how your organization's growth and expansion are financed.
There are two ways to report your organization's cash flow: Direct or Indirect. Direct Method is typically used for those organizations that are using the Cash Method of accounting. The Indirect Method is needed for organizations that are using the Accrual Method of accounting.
If you are using the Direct Method, you are then required to report your Statement of Cash Flow using the Indirect Method. It is now optional if you wish to convert the information to the Indirect Method.
Availability and Resources of Liquidity
Qualitative and quantitative information is now required when looking at your organization's liquidity. Qualitative information should communicate how your organization manages its liquid available resources. In short, How does your organization ensure that it has enough liquidity to continue operations? This could be a line of credit or bank account balances to cover "x" number of weeks expenses.
Quantitative information should communicate the availability of resources to meet general expenditures within one year. This doesn't mean the expenditure of donor-restricted funds, it refers to the general operating expenses of your organization for the next year. Donor Restricted funds cannot be used to cover general operating expenses, so this will help provide transparency about the financial viability of your organization long term.
Investment Expenses will need to be presented "Net of Investment Income" on the Statement of Activites. Netting is limited to external and direct internal expenses only. This should help clean up this reporting of your Statement of Activities.
Expenses should now be reported by Function and Nature. Your organization should already be reporting expenses as the Function in either your financial statements or in the notes or in the IRS Form 990. Your organization will also be required to disclose how expenses are allocated by function.
If your nonprofit does not currently present a statement of functional expenses, this may be one of your greater challenges.
There are quite a few changes listed above, many of which your organization can handle with no problems. Keep in mind a couple of things: 1) This is only phase one of the changes that will be coming your way. Phase two is expected to be released within the next couple of years. 2) Implementation requirements: These changes are effective for annual financial statements issued for fiscal years beginning after December 15, 2017, and for interim periods within fiscal years beginning after December 15, 2018.
If you have any questions concerning these changes, please let me know. I will do a follow up post with all questions in a couple of weeks.