Accounting for Nonprofits Changes Dramatically with Expected FASB Promulgation

 

accounting for nonprofits

Do you have a plan to implement the upcoming FASB regulations changes to accounting for nonprofits? Change in accounting is not something that nonprofits are used to dealing with since the rules have been stable for more than 20 years. But, change is on the horizon. The Financial Accounting Standards Board (FASB) is close to finalizing a proposal that will significantly impact not-for-profit entities. If your organization is a university, museum, charity or other nonprofit, you will no longer be able to independently define how you measure your operations. The primary goal of the new standards is to provide greater transparency and comparability of nonprofit financial reporting. Transparency is a good thing, nevertheless, the FASB promulgation will create a ripple effect throughout the nonprofit community as everyone adjusts to the requirements.

The expected FASB promulgation will change the way that nonprofits in general report activities on their financial statements. The FASB has been studying nonprofit accounting standards since 2011 and, finally, the changes are imminent. While the new standards have not yet been adopted, it is worthy of noting their upcoming impact. It’s a good idea to begin thinking through the different areas where your systems, procedures and accounting methods may need to change to reflect these updates.

Important FASB Changes to Accounting for Nonprofits

  • Nonprofits will report expenses by both their nature and their function.
  • Investment expenses will be netted against investment income on the face of the financial statement.
  • Nonprofits will be required to disclose internal salaries and benefits netted against investment returns.
  • There are two new operating measures:
    • mission dimension on how and if resources are from or directed to carrying out the purpose of existence; and
    • availability dimension of resources and whether they are available for current-period activity. This must also reflect both external limitations (restrictions) and internal (board designations/actions).
  • Restricted fixed assets must be released from restriction when placed in service, not over the useful life of the assets
  • There are two net asset classifications: Assets with Donor Restrictions and Assets without Donor Restrictions. The three class system goes away.
  • Endowment balances that are “underwater” are moved from Unrestricted to Assets with Donor Restrictions. Also the entity must disclose the original corpus, the current FMV, and entity spending policies.
  • Cash flow will be the Direct Method which calls for separate reporting of cash receipts and payments tied to operating activities. The Indirect Method will not longer be acceptable.
  • The organization will be required to provide quantitative and qualitative information to help asses it’s liquidity.

FASB Promulgation Expected in Two Phases

Because of controversy related to some of the proposed standards, the FASB has split the requirements into two phases. The first phase will focus on the measures that are generally supported by stakeholders including improvements to the net asset classification, reporting of expenses and liquidity disclosures. Phase one is expected to be released in mid-2016. The second phase may take more time to resolve as it focuses on the controversial topic of requiring all nonprofits to present two measures of operating activities. Also included in phase two is a change in the Statement of Cash flows realigning certain terms.

Nonprofit Accounting Software Can Help You Navigate the Change

Maneuvering through these significant changes in reporting could be challenging and costly. It will be important to understand the new rules and follow the deadlines for implementation. RBP Methods is following the FASB proposals and will keep you informed as changes occur. Once they are adopted, you can count on us to provide nonprofit accounting software that will comply with the new rules and ease your transition to them.

RBP Methods has seen many changes in accounting for nonprofits over the years including more demanding user expectations, rapid technology advancements and more. We can assist you with these changes as well. If you have any questions about how these rules will impact your organization, give us a call. We are happy to talk to you about this and how our nonprofit accounting software and services can help you navigate these changes.