2018 Changes to Nonprofit Reporting

Financial statements of nonprofits will look at bit different in 2018. The changes may not be that noticeable to the untrained eye, but they will happen due to FASB (Financial Accounting Standards Board) attempt 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 not providing enough information to assess liquidity and ability to pay bills. This update, known as ASU 2016-14, focuses on 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)

The main changes regarding this accounting update are:

Only two classes of net assets

As you may know, net assets are elements that 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 until now, with statements showing three columns or lines, there will be only two net assets.  It doesn’t mean that the accounting of temporarily and permanently 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 modified 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 investments is lower than the original value of the gifts, 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 are reported under the unrestricted net assets area. However, after this update, accumulated losses are to be shown 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 any deficiencies of the underwater endowment fund.

Liquidity

Liquidity is the ability of a nonprofit to pay its bills, a valid concern to many donors and grantors. As many donors restrict gifts, it can be hard to determine if an organization has the money necessary to pay its current bills. Financial flexibility is essential 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 money restricted by the board.

For more information, check out the book “Nonprofit Finance: A Practical Guide –  Second Edition”

Quick Tips on Nonprofit Financial Planning

Each organization is different, but every one of them is likely to face  challenges when planning for the future. Cash flow is crucial –no business, including a nonprofit, can survive without proper funding. However, many times people are concerned about the day-to-day activities of an organization and don’t pay attention to planning ahead. This issue has become even more important now that FASB released a new guideline requiring nonprofits to show how they can pay their bills in the next 12 months.

Check out 5 ideas that nonprofit managers may consider when conducting financial planning for an organization:

1- Use a budget

Budgets should be prepared before the year starts. Small organizations could use the prior year’s income and expense numbers as budget numbers for the following year. Once a budget is set up, then income and expenses should be compared to the numbers to be sure the organization is on target financially. Running a nonprofit without a budget is like shooting in the dark. It’s too easy to forget details and to end up with no money at the end of the year.

2- Pay attention to the timing of your cash flow

Cash is king in the nonprofit world. Without cash, an organization cannot pay its bills and must close or merge with another nonprofit. Timing is crucial, not just the amount of funding. For example, if an organization has a big bill to pay in August, but the money to cover this expense will be received in November, the nonprofit must deal with this shortage and start planning for it months in advance.

3- Consider getting a line of credit BEFORE you need it

Since funding can be cut or reduced with not much prior notice, nonprofits should get a line of credit from its bank. The best time to apply and get such line of credit is before the nonprofit needs it. This money could be used if funding is delayed or to cover a planned short-term cash shortage. Inquire about special lines of credit for nonprofits, which may have a lower interest rate and more favorable terms.

4- Educate your board of directors on financial literacy

Many organizations have very involved directors and officers, but they may not have the financial knowledge required to run a nonprofit. Therefore, such leaders should get a basic understanding of finance to evaluate reports and to hire and staff the accounting department properly. Some boards hire an outside consultant to come in a few hours a month or a week to supervise staff and resolve any problems before they become major. It’s an option, but the board must understand what is going on.

5- Allow for surplus

When planning, be sure to consider a cushion for the unexpected. This could be 2-10% of the total budget for a year, or an amount or percentage agreed by the board. This surplus, also known as “reserve,” is to be used for emergencies or unexpected costs, and is usually replenished once used up. The plan should be NOT to use these funds, but to have them, “just in case.”

Financial planning for a nonprofit can be a bit of a challenge, but it should be done to maximize the chances for survival and growth of a nonprofit. Without planning, small organizations may get by, but may not be ready for unexpected funding cuts. Making financial planning a priority can help your nonprofit to go in the right direction and make a difference in the community.

See more:

Nonprofit Finance: A Practical Guide – Second Edition– First edition was nominated for the 2016 McAdam Book Award

What you need to organize a nonprofit well – Article-Blog