Not-for-profits: Help shape the new financial statements impacting your organization

Published April 23, 2015 by Bo Garner, CPA, MBA

With nearly 60,000 not-for-profit organizations and associations serving the commonwealth and reported assets exceeding $162 billion according to TaxExemptWorld, it is safe to say these organizations significantly impact Virginia’s communities, jobs and economy.  Communicating this impact is about to become the focal point of new financial reporting standards specifically targeted for this group.

The Financial Accounting Standards Board (FASB), the organization that establishes financial accounting and reporting standards in the United States, has released an initial draft of proposed changes to the way not-for-profit organizations report their resources on hand and financial results of programs and operations. This draft was released on April 22, with the comment period closing approximately Aug. 21, 2015. The good news: During the comment period, industry stakeholders will have a chance to critique the proposal, which will likely impact them for a decade or more.  The current rules were ushered in more than 20 years ago.  

Under current rules, organizations have a fair degree of flexibility in how they present their numbers and what they measure as an equivalent to profits and losses.  As one might imagine, this results in diversity in practice and difficulty comparing the efficiency and effectiveness of similar organizations.  Furthermore, the recent recession brought to light limitations of the current standards to assess performance, liquidity and financial stability.

The proposed changes require measures of performance and tie financial results with program and service accomplishments, as well as affect the presentation of resources, restrictions on those resources and liquidity.  What follows is a brief description of the significant changes from current practice.

• Operating results — The FASB wants to further clarify and separate operating measures from non-operating measures. The term operating measures means revenues and expenses directly related to the not-for-profit’s mission that are for the current period but not subject to donor-imposed restrictions. Distinguishing operating measures should give the reader a better picture of the not-for-profit’s financial standing.

• Resources and restrictions —The FASB proposes to reduce the number of net asset classifications from three to two. No longer will nonprofits have to distinguish between temporarily and permanently restricted net assets. Under the proposed standards, not-for-profits will have to classify net assets as either with or without donor-imposed restrictions. The FASB wants to increase the amount of disclosures around donor-imposed net assets so the user knows how and when the restrictions can be lifted. The purpose for this change is for the readers of the financial statements to have a clearer picture on the accessibility of the organization’s assets.

• Liquidity/cash flow — The FASB has proposed that all not-for-profits must use the direct method for the statement of cash flows. If they want to continue to use the indirect method they can but in addition to the direct method presentation. The point is readers should get more out of seeing the direct in-flows and out-flows of cash, versus a reconciliation of the change in net assets to the cash balance.

• Functional expenses — Under the new proposed requirements, the FASB will require all not-for-profits to show operating expenses by functional class. The proposed presentation options would allow the not-for-profit to present this in a separate schedule, or combined on the statement of activities. This change is designed to provide another level of transparency to the readers.

• Disclosures — In theory, removing the restricted net asset categories should simplify nonprofit accounting and financial reporting. However, it appears that the amount of information required to be disclosed around donor imposed restrictions will mandate more thorough recordkeeping. Further, there are also tentative changes to investment reporting and extended disclosures related to underwater endowments. Balancing brevity with the additional required disclosure will be a challenge for all nonprofits.

So, now what? For starters, look for the proposed rules, which were announced in the form of an “exposure draft.” They appear on FASB’s website, www.fasb.org. Consult with your accountant and/or auditor and assess how the changes might affect your organization. Determine how best you can prepare for and use the new rules to effectively communicate your mission and accomplishments.  Then, let FASB know, in detail, your findings — both positive and negative — and what can be done to improve the changes. Remember, all not-for-profits, associations and their stakeholders are encouraged to comment and share in shaping the final document.

Bo Garner, CPA, MBA, is an audit supervisor at PBMares, LLP and is a leader of the firm’s nonprofit team. PBMares is a regional accounting and business consulting firm serving clients throughout the Mid-Atlantic. For more information, please contact the author at [email protected] or visit: www.pbmares.com.