Nonprofit organizations are now subject to their first accounting standard change in over 25 years. Nonprofits are required to produce a new presentation of their financial statements beginning with calendar year-end 2018. For many, this will be mildly delayed until their fiscal year ends later in 2019.
The major areas of change include:
Liquidity is going to be an open book. By adding new requirements to present assets based on liquidity and whether they are or not they spoken for, will create a view of the organization’s ability to pay their operating expenses for the next 12 months. Perhaps the most significant change in the reporting model lies in the increased disclosure in this area to inform readers about any restrictions the organization has on its operating funds and how much funding may be available to cover shortfalls on the next ‘rainy day’.
Restricted asset classes – Assets will be simplified into those that are restricted for use by donors and those that are not.
Expense reporting will become even more transparent. The financial presentation will require the reporting of expenses by function (program and supporting activities) and natural class (such as salaries). While there are some that will argue that the ‘gold standard’ in nonprofits is to dedicate more than 75% of donations toward programs and thereby minimize supporting administrative expenses as much as possible, a real key to this area is understand how other organizations are functioning when offering similar services. In other words, consider how your organization balances the use of its funding for programs and supporting activities today and makes the necessary long-term and strategic investments that will serve the future. This information will be increasingly important to donors when they evaluate their contribution options.
Net investment returns will be reported. Expenses related to investments or salaries for those directly involved in investment management will be subtracted from the total return, decreasing your overall net return. Expect some questions from board members and Donors on this one - they’ll wonder why the investment returns do not look as good as in prior periods.
The statement of cash flows can still be presented under the indirect or direct method. However, if you are one of those in the minority that has been using the direct method, you will no longer be required to present a reconciliation of the indirect method.
The best advice is to prepare; prepare now. Internal finance professional as well as board members should be seeking training, information and examples to assist with the implementation of the new model. Likewise, fund development professionals should become intimately familiar with the new presentation as they will surely need to respond to the numerous questions that will arise from grant agencies, foundations and other donors when they first see the reported results under this new framework.
Wayne R. Pinnell, CPA, is a founding member and serves on the advisory board for the Center for Business Growth. Wayne has over 30 years serving business owners in his public accounting career. He is managing partner of Haskell & White, LLP, one of the largest independently owned accounting, auditing and tax consulting firms in Southern California, servicing public and private middle-market companies. Wayne consults with a number of companies on their general business operations including workflow, waste reduction, strategy, and growth/profit initiatives. He can be reached at WPinnell@hwcpa.com or 949-450-6200.