FASB rules for nonprofits took effect in December 2017. Is your nonprofit ready?
The Financial Accounting Standards Board (FASB) issued new rules for nonprofits on August 18, 2016. This is the first major set of changes to nonprofit financial statement presentation standards since 1993. The new rules take effect in December 2017.
Goals of New FASB Rules for Nonprofits
FASB’s goals focus on improving the delivery of information for donors, grant makers, creditors, board members and others who read nonprofit financial statements. These rules simplify how a nonprofit can tell its story through its financial statements. FASB’s intent is to boost the usefulness of nonprofit financial statements and reduce complexities and costs associated with financial reporting.
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Impact of New FASB Rules for Nonprofits
All nonprofit organizations, including charities, foundations, private colleges and universities, health care providers, cultural institutions, religious organizations, and trade associates, and more will be affected by the new rules.
These rules will apply to the presentation audited financial statements.
If your nonprofit organization does not require an audit, the rules apply to a Review engagement and any financial statements that are required to be prepared in accordance with Generally Accepted Accounting Principles (GAAP).
Purpose of New FASB Rules for Nonprofits
- Simplify and Clarify
The new rules simplify the treatment of net assets in financial statements by focusing on the existence or absence of donor imposed restrictions as opposed to the types of restrictions, such as temporarily restricted vs. permanently restricted. This will clear the confusion surrounding the classification of temporarily restricted versus unrestricted assets. Under the new rules the Statement of Financial Position will only have two classes of “Net Assets” — net assets with donor restrictions and net assets without donor restrictions. Footnotes will also be changed to explain these classifications.
More importantly, the new rules replace the current three required classes of net assets (unrestricted, temporarily restricted and permanently restrict) with two new classes, simply those with donor restrictions and those without donor restrictions. This will simplify keeping track of donor imposed restrictions. Other advantages are the financial statements will now also provide more useful information about the nature, amounts, and types of donor restrictions. Nonprofits will no longer be required to distinguish between temporarily and permanently restricted net assets. Nonprofits will be allowed to provide more useful information about limits placed on net assets by both boards and donors.
- Clarify Cash and Available Assets
This rule requires nonprofits to reveal limitations on the use of liquid assets (cash and investments). Nonprofits need to be prepared to discuss these restrictions with their CPA performing the audit or review engagement. They will be required to provide quantitative and qualitative information to explain how an organization manages its liquid resources available to meet cash needs for general expenditures within one year of the balance sheet date. Qualitative information will be handled by a “classified” presentation on the statement of financial position (breakdown of current and non-current assets and liabilities).
- Quantitative information is handled by disclosing whether a financial asset’s availability if limited by:
- Its nature
- External limits imposed by donors, grantors, laws or contracts
- Internal limits imposed by governing boards
The new rules require investment income to be reported net of related internal and external investment expenses (currently optional).
They will not be required to report the amount of those netted investment expenses. This removes the complexity of identifying costs associated with investment fees in investment returns such as mutual funds and hedge funds.
Nonprofits should be aware of the amount paid for investment management fees.
- Correct misunderstandings about Statement of Cash Flows and Related Presentation Options.
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Bottom Line
Nonprofits continue to have the freedom to choose to present operating cash flows using either direct or indirect methods (whichever best serves the informational needs of reader’s of the nonprofit’s financial statements).
The new rules eliminate the requirement to present or disclose the indirect method of the notes if the direct method is presented on the statement of cash flows.
This results in a more useful statement of cash flows and reduction in costs to prepare the financial statements.
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