For over 20 years, non-profit accounting practices have remained almost entirely unchanged. However, due to recent actions by the Financial Accounting Standards Board (FASB), significant changes have been proposed in order to increase transparency and continuity in the preparation of financial statements for non-profits. In the past, Generally Accepted Accounting Practices (GAAP) has not clearly specified a specific way of reporting operating performance. This change is important because it will allow non-profit organizations to become more comparable across industries whilst generating easier-to-interpret financial statements for the purpose of obtaining loans and investments.
Changes to net asset classification
The proposed Accounting Standard Update (ASU) changes the non-profit accounting requirement for what information must be presented in the statement of financial position. The current three classes of net assets (unrestricted, temporarily restricted, and permanently restricted) will now be reduced to two classes of net assets (net assets with donor restrictions and net assets without donor restrictions). This change is intended to simplify financial reporting.
In addition, the FASB has revised how underwater donor restricted endowment funds are to be classified. They believe it is confusing to classify the spending from underwater endowments as unrestricted, and thus, they have proposed that underwater amounts be classified in net assets with donor restrictions. They are also now requiring disclosure of the combined amount of funds that are underwater and the original endowment amount, along with any rules or restrictions on spending from such funds.
Statement of Activities
Along with the changes to net asset classification, a corresponding change to the statement of activities has been proposed. Now, all non-profits are required to report income or losses from operating and non-operating activities separately. This is because certain non-operating activities, like investment earnings or losses, can affect the operating bottom line. The FASB believes this will help to clearly show both income and costs that are related to accomplishing the non-profit’s mission.
Presentation of Cash Flow
Changes to the statement of cash flows have been proposed in order to provide more useful information to key stakeholders on the overall operating performance of the non-profit. First, the board is proposing the use of the “direct method” of reporting cash flows from operating activities. The second change will realign the reporting of certain items to be consistent with how items in the statement of activities are being reported. Items such as operating, financing, and investing categories will be affected. The FASB believes these changes will result in easier-to-read financial statements which will prove to be more useful for the average user of financial statements.
Assessment of liquidity
The FASB has also proposed changes they hope will result in a clearer picture to stakeholders of an organization’s liquidity. Donor imposed restrictions and confusion about how they affect the availability of assets have caused a lack of clarity regarding the assessment of liquidity. The proposal requires both qualitative and quantitative information regarding the liquidity of assets and cash demands as of the reporting date. Along with the changes to net assets, classification of this information should allow users to assess the liquidity risk of the non-profit.
As with any change, an investment of time for non-profit’s and their accountants will be necessary to implement the required changes. The FASB’s proposal will allow stakeholders to better examine financial performance as well as the need for funding and overall stewardship of donor funds. In the end, the non-profit should experience significant benefits from the extra work as better information is provided to decision makers.
Here at RBP Methods, whether your goals are financial or cause-related, we offer the tools and services needed to carry out your mission. Contact us to learn more about non-profit accounting tools and see how we can support you as you consider implementing these required changes for your organization.