Nonprofits: Watch Out for Major Changes to Your Financial StatementsApril 27, 2015
In an effort to make financial statements more useful for donors, lenders and other stakeholders, the FASB has proposed significant changes to nonprofit accounting standards.
Major changes are headed your way, nonprofits! On April 22nd, the Financial Accounting Standards Board (FASB) publicly announced significant changes to nonprofit reporting practices in their proposed Accounting Standards Update (ASU): Presentation of Financial Statements of Not-for-Profit Entities. These will be the first major changes to the nonprofit accounting world in over 20 years and the FASB hopes that through these changes, nonprofits will be able to improve the practicality and understandability of their financial statements for the variety of stakeholders involved.
A closer look at the changes
The FASB intends to bring many changes to accounting practices, and if the proposed changes are approved, organizations will be required to (among other things):
- Simplify the net asset classification process. The FASB plans to reduce the number of net asset classes from three to two. The classes proposed are (1) those subject to donor restrictions and (2) those not subject to donor restrictions.
- Present underwater endowment amounts in net assets with donor restrictions, with enhanced disclosures. Currently such amounts are reported as unrestricted net assets.
- Present two measures of operating performance in the statement of activities. Organizations will be required to show any available amounts that have been generated by or have been directed at carrying out the mission of the organization in the current period (both before and after any governing board actions altered that availability of net assets without donor restrictions).
- Present statements of cash flows using the direct method of reporting. Creating a statement of cash flows using the direct method involves presenting the actual cash flow amounts from the organization’s activities rather than using accrual accounting values.
- Disclose quantitative and qualitative information regarding the NFP’s liquidity and how it is being managed.
With longstanding financial reporting practices changing significantly for NFPs, take time to understand the changes and how to properly implement them in your organization’s financial statements. The FASB is asking stakeholders to review these proposed changes and provide any comments by August 20, 2015. In addition, the Board will be hosting an educational webinar on May 12 at 1:30 p.m. EDT to provide a closer look at the proposal.