By William B. Ford, CPA, Manager, ALL CPAs
The day has come! The Financial Accounting Standards Board’s (FASB) new rules for not-for-profit (NFP) financial statements (Accounting Standards Update 2016-14 (ASU)) now takes effect for all NFP’s with December 31, 2018 and later fiscal years (including the recent June 30th fiscal year end).
The FASB issued the new standard with the intention of providing NFP financial statements with more clarity due to a perceived lack of transparency. They believe the new requirements will allow decision-makers to make more informed decisions; provide lenders with the information needed to lend; give donors and grantors information to feel comfortable with their donations and for government regulators to ensure compliance with rules and regulations.
A couple of areas of the new ASU will require some advance preparation and input. Planning meetings and discussions should be held with the finance committee and/or senior management and/or senior financial management. The planning discussions should include the following:
1. Financial statements now require disclosures applicable to an NFP’s liquidity
a. Qualitative disclosures – information that communicates how your organization manages its liquid resources to meet cash needs for the forthcoming twelve months.
i. A positive – have availability to special lending arrangements (bank line of credit)
ii. A negative – Insufficient cash to comply with donor restrictions
b. Quantitative disclosures – need to numerically disclose the NFP’s financial assets (cash, accounts receivable, investments) available to meet operating expenses for the next fiscal year.
The liquidity disclosures may not be a significant issue for some NFPs, but for others, they will surely create some angst. The silver lining is that it may bring improving liquidity to the forefront of board and management discussions.
For those voluntary health and welfare organizations (VHW), the NFP is used to providing a statement of functional expense. The new ASU expands the applicability to all NFP’s and adjusts the requirements for VHW organizations.
2. Financial statements now require disclosures applicable to an NFP’s reporting of expenses
a. Location – the expense information required may be:
i. On the face of the Statement of Activities
ii. As a schedule in the notes to the financial statements
iii. In a separate financial statement.
b. Content – To include functional expense classification and natural expenses classification.
i. Functional expenses allocation – depicts expenses by program services (mission-based, direct care) and supporting (G and A, Fundraising and Development) services.
ii. Natural expense allocation – grouping expenses by the economic benefit received (wages and salaries, employee benefits, supplies, rent and utilities and professional services, interest expense and depreciation).
c. Other
i. Disclose method of allocation of costs.
ii. Investment fees and costs are netted against investment income and not included in the functional statement/schedule.
iii. Special event expenses (raising funds through a social gathering) can be netted on the Statement of Activities (if the event is “peripheral or incidental”). If the event is an ongoing major or a central operation and activity, the proceeds are to be reported gross. Many NFP’s follow the Internal Revenue Service format of reporting gross proceeds and then subtracting direct event expenses. In these cases, the expenses are also not included in the functional statement/schedule.
I hope this provides assistance with meeting the new NFP financial reporting requirements. If you would like further elaboration or have any questions, please email me at bford@all-cpas.com or call me at 617-738-5200. I will be glad to help in any way I can. And don’t worry, the new day will be better than the last!
About the Author
William B. Ford, CPA
