Nonprofit Finance: A Practical Guide is available now as a kindle book on Amazon:
Nonprofit Finance: A Practical Guide is available now as a kindle book on Amazon:
The second edition of my book, “Nonprofit Finance: A Practical Guide,” is out. It includes detailed coverage of FASB update regarding reporting, details about liquidity and other details effective in 2018. For example, the official financial reporting will show only two net assets, but internally, a nonprofit should maintain the three net assets separately and combine the temporarily and permanently restricted for reporting only.
Internal controls are covered in detail for cash, payables and computerized systems, giving ideas about how to minimize certain risks specific to the nonprofit sector.
Like the first edition, nominated for a McAdam Book Award, this second one has many examples and suggestions based on real-life experience, not just theories. It was written with both the accountant and the non-accountant in mind, so that people of different backgrounds can benefit from the material and put it to good use right away.
You can check the new edition at https://goo.gl/M563u9
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 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”
Oh no….Marcie from accounting is again asking for receipts, signatures and other stuff. Can’t she see that we’re busy? What’s wrong with these people? Where do they come up with these ideas? Well….there is a reason for this apparent madness and annoyance.
Many managers indeed get aggravated with demands from the accounting/financial department. However, nonprofits have a lot to gain by following proper accounting requirements, such as requesting proper receipts or approvals. The requirements may seem a bit burdensome, but they serve important purposes within a nonprofit organization’s operations. These requests are not to drive you nuts.
Oftentimes requirements for certain tasks are to assure that processes flow properly with enough check and balances to avoid errors or fraud. Below are a few important reasons for nonprofits to follow accounting requirements:
1- Financial requirements may be mandatory for recipients of federal and other government funding, such as demands for certain internal controls to avoid errors and misappropriations and the use of a budget. There is really no choice — either the nonprofit follows the prescribed requirements or funding stops.
2- The IRS specifically asks about financial tasks on the tax form 990, the information return filed by many nonprofits. For instance, the return explicitly inquires about the number of items reported on the form 1096, the Annual Summary and Transmittal of U.S. Information Returns. This is usually related to reporting payments to contractors over a certain amount. To comply with this inquiry properly, the nonprofit should have financial rules to capture this information.
3- The nonprofit must also follow all local, State and federal laws. For example, employees may need to file time sheets to be paid correctly. If they don’t follow this accounting rule, paychecks may be printed incorrectly, putting the nonprofit at risk for fines and penalties. So, accounting folks must require proper documentation and approvals so that this process run smoothly.
4- Following financial guidelines protect nonprofits from errors and fraud. An example would be the procedure of requiring approvals on all invoices to be paid. Usually, a supervisor approves such invoices to avoid payments for fake or wrong items or services. You don’t want employees charging the nonprofit for their own tech or other personal purchases.
5- Compliance with accounting requirements, including financial processes, are often evaluated by auditors to assess the risks of nonprofits. For instance, if an accounting requires monthly cash reconciliations, but the auditors note that they are actually done once every four months, most likely the audit risk will increase along with the costs of such audit. So, accounting requirements are to be followed ALL THE TIME to avoid problems. Even by the accounting department.
6-Financial rules can help in building a nonprofit’s competence while minimizing confusion. For example, a rule to pay bills on only certain days every week may give employees the sense of a set order in finance. One cannot walk in and expect that a check would be ready within minutes. Financial rules can instill confidence and controls within a nonprofit.
Accounting, taxes change throughout the years, so don’t be surprised if the requirements change. For example, starting effectively in 2018, nonprofits must prove that they can pay their bills short term. This is a new requirement of FASB, the organization that dictates accounting rules for nonprofits. So, expect some new requirements from folks from the accounting department regarding this new guideline and others coming down the pipe.
You can check the new edition of the book Nonprofit Finance A Practical Guide at https://goo.gl/M563u9 -First edition nominated for a McAdam Book Award.