The Financial Accounting Standards Board (FASB), the body that sets accounting standards for nonprofits, recently announced new standards that will change nonprofit financial reporting beginning December 2017. The aim is to help nonprofits provide better financial information to donors, creditors, grantors and anyone else who needs access to their financial statements.
FASB Chair Russell G. Golden said that the new guidance would result in simpler financial statements, would improve nonprofits' ability to share the financial picture with stakeholders and would reduce some of the costs of financial reporting.
Let's dig deeper into the areas of financial reporting that the accounting standards update will affect.
Net Asset Classes
The new standards will replace the three previous classes of net assets with two new ones: net assets with and without donor restrictions. According to the FASB, the classification of underwater amounts of donor restricted endowment funds has been changed, and there are also additional disclosures required.
The benefit: The FASB says this will simplify reporting processes and make information easier to understand. The disclosures make limits on net assets applied by donors and governing boards much clearer.
Liquidity and Availability of Resources
With regard to liquidity and the availability of resources there is now a requirement to provide qualitative information on how nonprofits manage liquid available resources within one year of the balance sheet date, and quantitative information about the availability of its financial assets to meet cash needs within a year of the balance sheet date.
The benefit: The FASB says this change “will provide a foundation of information for users to help begin their assessment of a not-for-profit's liquidity and financial flexibility."
Expenses and Investment Return
Changes to expense-related standards focus on helping others understand the difference between fixed and discretionary expenses, the allocation of related resources and the costs of any services provided. That means that expenses must now be listed by both nature and function.
The benefit: The FASB says this type of reporting "provides a more comparable measure of investment return against all not-for-profits." However, it is no longer necessary to disclose netted expenses, such as those incurred where management fees become part of the investment return on mutual funds and hedge funds.
Presentation of Operating Cash Flows
The final change covers cash flow reporting. Nonprofits can continue to use either direct or indirect reporting to present net cash flows but no longer have to report on the indirect method if they are using the direct method.
The benefit: This change is intended to help some nonprofits reduce costs.
Helping Nonprofits Tell Their Story
This is the first update to the standards since 1993. In creating them, the FASB held three public roundtables, 10 workshops and more than 100 meetings.The new standards will apply to financial years December 15, 2017, and interim periods for years beginning December 15, 2018.
“Under this standard, a not-for-profit will be able to provide more relevant information to allow users to understand both its resources and changes in those resources during a period," says FASB Supervising Project Manager Rick Cole.
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Sharon Hurley Hall is a professional freelance writer and blogger. Her career has spanned more than 20 years, including stints as a journalist, academic writer, university lecturer and ghost writer. Connect with Sharon on her website and Twitter.