By now, you have probably heard about Accounting Standards Update No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities. Here is another look at the update and how it will affect financial management for nonprofit organizations.
This update will help nonprofits provide better clarity and transparency in their financial reports and requires several changes on how information is classified and reported.
Numbers Tell a Story
People naturally gravitate towards stories. Since earliest childhood, we listen for stories, and we respond to them from an emotional as well as logical perspective. So, it’s not surprising that FASB’s new guidelines for nonprofit accounting attempt to help nonprofits tell a story through their numbers. Nonprofits struggling with the new accounting rules should keep in mind the impetus behind the changes. If you keep the reason in mind, it’s easier to understand why FASB has requested the changes it has and how your nonprofit organization can comply with them.
Helping Donors Understand Your Organization
Nonprofit organizations have a responsibility to their donors, patrons, sponsors, and members to tell a complete, comprehensive, and transparent story with their financial reports. People who give money to a nonprofit want to be sure that their money is used responsibly in support of the organization’s mission and activities.
Much has been made in recent years of nonprofits who have spent excessively on activities that donors view as superfluous. Although nonprofits are still free to spend as they wish within the limits of their charter, the new, enhanced transparency in financial reporting will help donors and the public understand how finances were spent.
Telling a compelling, honest, and articulate story through your numbers can help donors understand more about your organization. The new FASB requirements, for example, include qualitative information added on how organizations manage liquid available resources and liquidity risks. The updated regulations also require reporting of expenses by both function and nature, two additional areas you can use as an opportunity to share information with your constituents.
Consider the information that goes into these sections. If you are reporting expenses by both function and nature, you can provide additional details that will help donors understand the importance of expense categories. The functional areas can help them understand the areas of your organization. Additional details can be provided to help donors understand the various activities supported by these funds.
Additional Changes in Financial Management for Nonprofits
There are other changes in the guidelines that will be in effect for fiscal years beginning after December 15, 2017. These include:
- Reducing the number of net asset classes from three to two;
- Continue allowing preparers to choose between the direct and indirect method for presenting operating cash flows;
- Eliminating the requirement for those who prefer the direct method to perform reconciliation with the indirect method;
- The reporting by nature and function, as well as reporting on liquidity risks and liquid available resources, as discussed in the ideas shared here.
RBP Methods provides accounting software, advice, and consulting in financial management for nonprofit organizations. Our financial management systems include software such as Abila MIP Fund Accounting™ and AccuFund Accounting Suite. These and other software solutions for nonprofit organizations provide easy to use, understandable, and useful software to track finances for nonprofits, manage donations, donor campaigns, and much more. Contact us or call 503-648-9051 for a consultation.