Accounting for nonprofits must include clear, transparent reporting in order to paint an accurate picture with their numbers for members, donors, and the public. Although most nonprofits strive to do this, the Federal Accounting Standards Board (FASB) made some changes to enhance clarity and transparency on their annual reports. These changes, known as Accounting Standards Update No. 2016-14, change a model that has been in existence for over 20 years.
Here’s a rundown of the changes in accounting for nonprofits according to the new ASU 2016-14:
- Reducing the number of net asset classes from three to two;
- Continue allowing preparers to choose between the direct and indirect method for presenting operating cash flows;
- Eliminating the requirement for those who prefer the direct method to perform reconciliation with the indirect method;
- Reporting by nature and function, as well as reporting on liquidity risks and liquid available resources, as discussed in the ideas shared here.
While these changes may not seem earth-shattering, they do help you communicate better with others reading your financial statements and clear up several misunderstandings and points of confusion in nonprofit accounting statements. The goal of the FASB efforts it to make murky areas clear and the new standards seem to do just that.
Numbers Tell a Story
The numbers that your nonprofit organization shares with the public tell an important story. They relate how your organization gathers resources, accepts donations, and spends its money. People who donate or join your organization need to understand that story in order to make smart decisions about their money.
In recent years, many nonprofit organizations have come under fire for what is perceived to be excessive spending. Lavish entertainment, trips, and unnecessary meetings (especially in exotic locations) are red flags to donors who want to be sure that their money goes to the activities the nonprofit supports, not to someone’s trip.
Although nonprofits remain free to spend their resources as they see fit, the new ASU guidelines will make it clear how they have spent their resources. Their ‘stories’, so to speak, will now be told loud and clear.
Additional Qualitative Information
Additional qualitative information about how nonprofits manage liquidity and liquidity risks can also enhance your communications with others on your finances. The updated regulations also require reporting of expenses by both function and nature. These two areas can be used to share more information with constituents about how money is spent, thus clarifying the information and enhancing transparency
Reporting expenses by both function and nature enable you to tell people more about the work that you are doing. The functional areas can help them understand the areas of your organization. Additional details can be provided to help donors understand the various activities supported by these funds.
When Do the Changes Take Effect?
The changes recommended in ASU 2016-14 take effect in financial statements issued for fiscal years starting after December 15, 2017. They also take effect for interim periods within fiscal years beginning after December 15, 2018. Application to interim financial statements is permitted, but it is not required in the initial year of application. Early application of the standard is also permitted.
Accounting for Nonprofits with Beck & Company
The new accounting standards for nonprofits may seem confusing to apply to your organization. If you have any questions, Beck & Company is here to help. We are a CPA and business advisory firm dedicated to the nonprofit sector. Our many years of experience can help you update your financial compliance or handle all types of accounting for nonprofits. Please contact Beck & Company today for further details.