On August 18, 2016, the Financial Accounting Standards Board (FASB) issued a new Update intended to simplify and improve how a nonprofit classifies its assets, investments, expenses, resources and cash flows. You may know FASB from your accountant or auditor – these are the standards that dictate accounting practices and therefore the way your organization tracks its financial position. The purpose of the Update is to make more transparent to donors and the general public the financial situation of nonprofit organizations. The rules will go into effect for annual financial statements issued for fiscal years beginning after December 15, 2017, and for financial statements reporting for less than a year (e.g., interim periods within fiscal years) beginning after December 15, 2018.
Here are some highlights of the changes in the FASB Update:
- Nonprofits will have to disclose their donor-restricted endowment fund investments that are underwater (e.g., worth less now than when they were donated).
- Net assets are now classified in two ways: 1) net assets with donor restrictions and 2) net assets without donor restrictions). Impact: eliminates the category of permanently restricted net assets.
- Nonprofits will have to disclose any self-imposed limits on the use of resources without donor-imposed restrictions. Impact: if your Board has designated assets, even assets that were received without restrictions, for a particular purpose, you’ll have to disclose that.
- Nonprofits will have to disclose the composition of net assets with donor restrictions.
- Nonprofits will have to show expenses by nature (salaries, benefits, supplies, rent) as well as function (program expenses, supporting expenses), including an analysis of expenses showing the relationship between functional and natural classification for all expenses.
- Nonprofits will have to disclose how they manage their available liquid resources.
- Nonprofits will have to disclose the financial assets that are available to meet cash needs (cash flows) for general expenditures within one year of the balance sheet date.
FASB Standards are specific and can be complicated. NPCC will be holding a training on this issue on Friday, September 30th. Click here to register.
NPCC friend and colleague, Fiscal Management Associates (FMA) will be hosting a webinar on Tuesday, September 13th on these changes.
As well, you should check with your accountant or auditor about how this will impact your organization’s financial recordkeeping and statements.
Resource: Accounting Standards Update No. 2016-14