New Financial Reporting Guidelines Can Be a Benefit, Not a Burden for Nonprofits

While the federal government was dealing with the shutdown at the start of 2019, many nonprofits were trying to sort out new reporting guidelines concerning their fiscal conditions.

Issued by the Financial Accounting Standards Board (FASB), “Presentation of Financial Statements for Non-Profit Entities,” or Accounting Standards Update No. 2016-14, is a 264-page document that offers the industry broad guidelines for the first time since 1993.

At first glance, the guidance looks highly complex and tedious. Though if you examine it a bit closer, you can see that it promotes enhanced transparency for donors, grantors, creditors and others who use nonprofit financial statements in making critical decisions.

At the same time, the guidelines offer nonprofits an opportunity to refashion their stories in ways that can appeal to those who provide resources.

That is what many accountants and consultants have been telling nonprofit boards of directors for the past year—informing them about the new standards that must be met in reporting activities and fiscal condition for 2018, for those using calendar-year accounting, or the near future for those with fiscal-year operation.

The key to the standards is less complexity in reporting, as well as better and more compelling use of footnotes. Overall, it is not a radical change in accounting.

The Rest of the Story

So, how can this help nonprofits?

Here’s an example. Many donors and grantors have long based decisions concerning contributing on their overhead, believing less overall expenses reflect greater stewardship. Many nonprofits believe this is over-simplified and can wrongly influence judgment.

The new standards require expense reporting, not only by “function,” but also by “nature.”

“Function” reflects broad reporting areas: program services, administration and fundraising, for example. It meets Generally Accepted Accounting Principles.

“Nature” is more specific, and breaks down functional categories such as administration into parts: salaries, expenses, office rent and the like. “Nature” also offers an opportunity to divide those parts among specific programs in ways that can demonstrate stewardship and favorable expense-to-contribution ratios.

Is this new? Not for some nonprofits because many are already doing this in filing IRS Form 990, “Return of Organization Exempt from Income Tax.” The financial reports often considered by donor, grantors and creditors are what are new.

Here’s another example. Donors, grantors, creditors and others are naturally concerned about a nonprofit’s ability to meet its obligations. The new standards require reporting both quantitative and qualitative measures of liquidity.

In the quantitative category, the nonprofit must disclose resources on hand to meet obligations for the coming year. However, a mere look at the balance sheet may not show the organization’s liquidity in its true light.

Looking a bit further, the quantitative category can show receivables, such as income from a grant coming in just after the new accounting year begins. It’s a resource that is part of a nonprofit’s budgeting process, and including it more accurately reflects the organization’s liquidity. So, too, are government payments into nonprofit programs that are due in the near future, though beyond the reported year.

Qualitatively, the FASB standards tell how a nonprofit manages and monitors its resources with an idea to the future. It’s a chance to tell a story of stewardship and sound decision-making that can appeal to a donor, grantor or creditor.

3 Down to 2

Even though some of this change is cosmetic, much is being made of the standards’ reducing classifications of net assets from “unrestricted,” “temporarily restricted” and “permanently restricted” to “without donor restrictions” and “with donor restrictions.”

In an interview with the National Council for Nonprofits, FASB supervising project manager Rick Cole calls the new terms “more intuitive” for people who do not have a nonprofit background.

For accountants, though, the job hasn’t changed. Donations are still handled individually, including acknowledgement of their restrictions and dates when those restrictions can be removed. Generally the restrictions are delineated in footnotes on audited financial statements.

This is especially true for endowments, which are permanently restricted, though their investment proceeds can be used in nonprofit programs. The FASB standards require more detail about endowments’ fair-market value as opposed to their contributed value. This is driven by an era of volatile stock markets that has sent some endowments underwater.

Detail is also required about a special class of restricted net assets set up by boards of directors, rather than donors, for future use in such areas as emergencies, expansions or mergers. Those funds are listed in the broad “without donor restrictions” category, with footnotes including dollar amounts, dates restricted and reasons for boards having removed them from general use.

What Else?

One area in which accounting gets easier is that it is no longer necessary to reconcile the indirect method to direct method for nonprofits. While the FASB standards frequently refer to the direct method in various categories, there is no mandate to use it.

That is good, because most nonprofits already use the indirect—or cash flow— system, rather than direct.

The Goal, Now and the Future

This year is critical for nonprofits as they adjust to the new reporting standards.

First, reports are going to require additional expense, which the FASB considers an investment in a nonprofit’s future. The organization also insists that using the standards eventually will lower reporting costs.

To make that expense an investment, it’s important for nonprofits to get off to a good start this year, establishing a foundation for future reporting.

That foundation includes creating a system that extracts needed information for reporting purposes from established accounting systems. Get it right the first time, and reap the benefits later. For that, nonprofits, and particularly those without accounting-savvy chief financial officers or controllers, should consult with accounting and auditing experts to make the new standards an asset, not a burden.