Starting on December 15, 2017, nonprofits financial statements will look a bit different.  The changes may not be that noticeable to the untrained eye, but some people may note a difference and be concerned. The change is due to  a new update from FASB, Financial Accounting Standards Board, trying to make financial reporting easier  to understand.  Even though current reporting rules have been in place for over 20 years, many people have complained that the financial statements of nonprofits are confusing with not enough information to assess their liquidity, their ability to pay their bills. This update has focused in resolving these concerns.

"Not-for-profit organizations that will be affected include charities, foundations, colleges and universities, health care providers, religious organizations, trade associations, and cultural institutions, among others" (FASB.org).  Since the update will take place towards the end of 2017, organizations have enough time to make changes to be able to comply with the new rules.  A few highlights those changes are:

Only two classes of net assets

As you may know, net assets hold information about nonprofits, accumulating increases and decreases in revenues and expenses throughout the years. A nonprofit account always belongs to a net asset, traditionally classified as unrestricted, temporarily and permanently restricted. No more. After this update, we will have only two classifications of net assets:

1-Net Assets Without Donor Restrictions, comparable to the "old" unrestricted net asset
2-Net Assets With Donor Restrictions, combining the "old" temporarily restricted and permanently restricted net assets.

So, instead of reporting on three net assets, as has been the case now, with statements showing three columns or lines, there will be only two areas.  It doesn't mean necessarily that the accounting of temporarily and permanent restricted net assets need to change internally, but these are now combined in the "official" financial statements.  Most likely, the reporting on the accounting software will need to be changed to accommodate the update requirements.

Underwater value of endowments 

Organizations may receive endowment funds that are held for long term or perpetuity.  When the fair market value of such funds is lower than the original value of the gift,  they are said to be "underwater."   Unfortunately, that has been the case with the volatility of the stock market and other losses.  Currently, such losses were reported on the unrestricted net assets area. However, after this update, accumulated losses are reported within the endowment fund -- net assets with donor restrictions.

Detailed information about endowments is also required as disclosures on the official financial statements, such as the current fair market value of the endowment, any amount required to be maintained, and the amount of any deficiencies of the underwater endowment fund.  

Liquidity

Liquidity is about the ability of a nonprofit to pay its bills, a valid concern to many donors and grantors.  As many donors  restrict the amounts they give, it can be hard to determine if an organization has the money necessary to pay its current bills.  Financial flexibility is a must for any nonprofit to be viable long term, so this update requires disclosures about how an organization will be able to meet its  financial obligations for the next 12 months.  Specific resources available should be disclosed, such as prior year's reserves and any emergency money restricted by the board.

Anyway It's good  for boards to see the analysis of cash and resources available to cover upcoming bills, since many boards only see revenues and expense reports, not really paying attention to the cash balance and management. Sometimes cash is available, but there are so many bills yet to be paid, that the board may be misled into assuming that all is well when it's not.

The overall idea here is to make financial statements more useful to others, such as donors, helping them understand the fiscal health of a nonprofit better.  Since it will be effective towards the end of 2017, organizations have  the time to get ready for this change in reporting.  Accountants will be certainly busy next months making sure accounts are properly set up to reflect the new reporting and disclosure requirements.


Read about board issues here
Read also No more Audit Freak out
Check out  the book 'Nonprofit Finance: A Practical Guide" -- Nominated for the McAdam Book Award
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