Nonprofits Get New FASB Standard Aimed at Simplifying Financial Reporting

By:
Chris Gaetano
Published Date:
Sep 27, 2016

Change Ahead SignCropped

The Financial Accounting Standards Board (FASB) has released the first major update on reporting standards for nonprofit organizations in more than 20 years, with the new rules aimed at improving how these groups present and release their financial information. 

The update, released on Aug. 18, was made in response to input from stakeholders who had expressed concern about what they believed were the complexity, insufficient transparency and relevance of certain aspects of the current reporting model, according to FASB Chair Russell G. Golden in a statement.

Allen Fetterman, a member of the Not-for-Profit Organizations Committee and a member of the Society’s task force that responded to the initial proposal, said that the new standards will focus on presentation and disclosure, versus any change in how nonprofits will account for transactions themselves.

“There is little change in what is being presented, but it really comes down to how,” said Fetterman.   

This, however, does not at all mean that the changes aren’t significant, he added.

One of the major reporting changes will be collapsing the three-asset classification system—composed of unrestricted assets, temporarily restricted assets, and permanently restricted assets—into two: net assets with donor restrictions and net assets without donor restrictions. The FASB, in its April 2015 exposure draft, said that this was to address misunderstandings and confusion about how restrictions or limits on assets imposed by donors, laws, contracts and governing boards affect an entity’s liquidity, net asset class, performance and terminology..

The new rules also retain an entity’s ability to use either the indirect method of reporting (adjusting changes in net assets to reconcile that amount to net operating cash flow) or the direct method (reporting sum of gross cash receipts and gross cash payment from operating activities). This is a softening of the FASB’s position in the April exposure draft, which would have made the direct method mandatory, a move that baffled the Society, which said in its Aug. 2015 comment letter that there was no clear reason to actually make such a change.

The FASB standard also requires a number of disclosures surrounding liquidity and how the organization manages it; self-imposed designations on non-donor restricted net assets; availability of financial assets to meet cash needs over the next year; the natural and functional classification of expenses; cost allocation methodologies; and underwater endowment funds. 

Candice Meth, chair of the Public Sector Oversight Committee and former Chair of the Not-for-Profit Committee, as well as another comment letter author, said that she appreciated the added flexibility the FASB gave in this final version, particularly the option of using either the direct or indirect method of reporting on the statement of cash flows.

“Given how diverse this sector is—private foundations certainly do not look or feel or operate the same ways as a healthcare nonprofit—that level of flexibility is key,” she said.

Both Meth and Fetterman were pleased with the outcome of the final standard.

“I’m actually very pleased with what has come out as a final document. I had some serious reservations about the proposals,” said Fetterman, noting that for the first time in his career he wrote a comment letter personally to the FASB on top of the NYSSCPA comment letter.

This is the first of what the FASB said will be a two-stage rollout of changes concerning nonprofit organizations. Phase I, which this final standard represents, concentrates on measures that can be implemented relatively easily, issues that are not dependent on other projects and are improvements that the Board might finalize in the near term. Phase II would encompass more complex projects that will likely take more time to resolve or are related to similar issues being addressed in other projects.

Simple or not, Phase I will take nonprofits time and effort to implement, Meth said. She noted that many parts, such as liquidity disclosures, are brand new and clients will have to start thinking about these measures soon. She also pointed out that consolidating three asset classes to two might cause some initial confusion about whether there would be encumbrances on amounts sitting in the category marked “without donor restrictions”. This, Meth says, means that the financial statement notes will become more important when talking about any sort of debt covenant.

“You may not see as much detail in the statements themselves, so I do think there’s a lot of legwork to be done, and that’s why it’s important to have these conversations early on,” she said.

Fetterman agreed, saying that the first thing nonprofit organizations should do is read the new standard and speak with their financial management to understand the necessary changes to be made. They should let their outside auditors know to prepare for the new guidance and this, he said, will be particularly important for smaller organizations. 

“Let’s face it, there are many small community-based nonprofits who will need their auditors extensively to provide guidance, [versus] your big nonprofits like universities and major hospitals, where their internal staff can implement most changes with minimal guidance from their outside auditors,” Fetterman said.

The standards are effective for annual financial statements issued for fiscal years beginning after Dec. 15, 2017 and for interim periods of fiscal years beginning after Dec. 15, 2018. 

cgaetano@nysscpa.org

 

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