Update: Nonprofit Reporting Standards

By Christine Arthur

In August of 2016, an accounting standard was released to establish the new financial reporting framework for not-for-profit organizations. This standard is the most sweeping change to nonprofit financial reporting in twenty years. The following is a brief overview of the standard and how it might affect your organization.

WHO WILL BE AFFECTED?

The new standard affects all nonprofit organizations and will result in changes in the presentation of the statement of financial position, activities and cash flows and related footnote disclosures.

WHAT ARE THE KEY CHANGES?

The new standard will require that organizations apply the following changes:

  • Reduction of the classes of net assets to two categories: net assets without donor restrictions and net assets with donor restrictions. Enhanced disclosures.
  • Changes in the accounting for, presentation and disclosure of endowments whose current fair value is below the value of the original donation (underwater endowments).
  • Disclosure of quantitative and qualitative liquidity information for the organization including cash available to meet operating needs and how an entity manages liquidity.
  • A requirement to report total change in net assets without donor restrictions and net assets with donor restrictions.
  • All nonprofits will be required to present an analysis of expenses by both function and natural classification on the face of the financials or in the footnotes.

WHAT DOES THIS MEAN FOR YOU?

Preparation for the new requirements will vary between organizations. Those with significant donor restricted contributions including endowments and board designated funds will have the greatest burden in both accounting for and disclosing these nets assets. Organizations with liquidity challenges will benefit from proactive cash flow management. All organizations will need to track their functional and natural expense classifications closely and provide the additional disclosures in the financial statements and or footnote disclosures.

WHEN DOES THE NEW STANDARD GO INTO EFFECT?

The new standard is effective for the fiscal years beginning after December 15, 2017. For organizations with a December year end the first year of reporting will be for the calendar year ended December 31, 2018. For organizations reporting on a fiscal year such as June 30, the effective date will be for the fiscal year ended June 30, 2019.

WHAT SHOULD YOU DO NOW TO PREPARE?

  1. Make sure you understand the definitions of the new net asset categories and develop an internal mechanism for identifying and evaluating internally and externally restricted net assets.
  2. Proactively manage cash flow to minimize negative impact of your financial position at year-end.
  3. Consult with your CPA for more advice on how to implement these changes.

Christine B. Arthur, CPA, Partner
Kyle Robbins, Audit Manager