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Financial Reporting Changes Underway

By now most people in the nonprofit sector may be aware of the recent set of changes for nonprofit financial reporting that were put in place by the Financial Accounting Standards Board (FASB). If you are not aware of these changes, perhaps this short article will help. This Accounting Standards Update (ASU) was issued in August of 2016. It is the first major revision for nonprofits since 1993 (phew)! If you have a calendar end fiscal year (12/31/18), your organization should be putting the new reporting standards into place now. For the rest of you, the standards must be in place by the end of your fiscal year that falls during 2019.

What do these changes require you to do? Your accounting processes do not have to change. However, your financial reporting (especially at year end) and what you must disclose has changed. This is all intended to make financial statements clearer and more revealing of an organization’s financial position. Here is what I understand the changes require (and I am not an auditor, so please be in touch with your auditor if you have one – if they have not already been in touch with you):

Net Asset Categories:

You know the challenge of unrestricted, temporarily restricted, and permanently restricted assets as reported on the bottom of your balance sheet (Statement of Financial Position)? Well, now there are only two categories that are fairly self-explanatory: “with donor restrictions” and “without donor restrictions.” You are encouraged to provide more detail within each of those categories (although it is not required).

Has your board designated cash reserves? You can indicate that as a subcategory of “without donor restrictions” (assuming that reserves have been built over time through unrestricted revenue).

Do you have an endowment funded with restricted donations? You can indicate that as a subcategory of “with donor restrictions”. Providing a narrative explanation is strongly encouraged.

Liquidity and Availability of Financial Assets:

You must now provide information about how you make sure you have enough cash for general expenditures that fall within one year of the balance sheet date. This should be done with numbers and narrative. This is a chance for you to tell a story about what you do to make sure your organization can survive a tough time. It is a fairly rare organization that has a year’s worth of unrestricted cash set aside, so do not worry if you look like you are “underwater” – just think about what you might do to improve that situation! This section is designed to encourage financial planning for the future beyond simply approving your regular operating budget.

Functional Expenses:

Most nonprofits already do this reporting as it is requested on the Form 990 that must be filed. It is also a useful way to track program expenditures on a regular basis. However, functional expenses must now be part of your annual reporting. It provides an analysis of expenses by line item and by functional classification (program, management, fundraising, etc.).

While the third requirement may be less difficult since many of you are already doing it, the first two are perhaps more challenging. There are tools and resources that are being made available to help you with these new reporting standards. Here are some of them:

Good luck with this transition! And may we all be better informed about our organization’s financial position as a result.

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