Changes coming to nonprofit financial statements
At Ketel Thorstenson LLP, we work with a lot of nonprofit organizations to make sure they comply with current accounting standards. Whether you are involved with a church in Williston, a youth group in Custer or a charitable foundation in Spearfish, you need to file the proper financial statements.
That’s why our CPAs who work with nonprofits noted with interest recently that major changes have been proposed for the way all nonprofit groups report expenses, financial performance, investments and assets. The Financial Accounting Standards Board (FASB) has issued an exposure draft that will change financial reporting for all nonprofit entities.
The last time an overhaul like this was done was in 1995, when FASB 116 and 117 gave us restricted net assets and functional expenses – remember that? Because it’s still an exposure draft, FASB is collecting public comments and will have additional deliberations prior to issuing a final standard (and no, FASB has not given an estimated implementation date yet!).
Experts say the changes will better tell a nonprofit organization’s “financial story” by improving net asset classification, liquidity information, financial performance reporting, and the cash flow statement. In case you’re not interested in reading all 261 pages of the exposure draft, here’s a quick summary of a few of the most significant changes:
- All nonprofits will be required to show expenses by their natural and functional classification – currently, only voluntary health and welfare organizations have this requirement.
- Investment expenses must be netted against investment return, and disclosure of the amount netted is no longer required.
- Two intermediate operating measures will be reported within the financial statements – a mission based dimension (i.e. do the funds carry out the organization’s purpose?) and an availability dimension (i.e. are the funds currently available?).
- The currently required three classes of net assets (unrestricted, temporarily restricted and permanently restricted) are reduced to two classes (with donor restrictions and without donor restrictions). “Underwater” endowment funds will be reported as net assets with donor restrictions (vs. unrestricted under current requirements).
- Cash flow statements will be prepared under the direct method of accounting, and several cash flow items will be reclassified into different categories. The commonly used indirect method will no longer be allowed.
- Quantitative and qualitative information used to assess liquidity will need to be disclosed.
Stay tuned as FASB fine tunes the exposure draft and issues a final statement – this will affect every nonprofit organization that issues GAAP financial statements. As your nonprofit experts, we will be prepared to assist you along the way!