The not-for-profit reporting model changes from the Financial Accounting Standards Board (FASB), effective now, are the first since 1993 and are intended to address inconsistencies in financial reporting. The changes offer creditors, funders and board members better information regarding the financial status of not-for-profits.
What is the impact of these changes?
Every not-for-profit will have some type of change to incorporate in their reporting. For example, functional expenses, which break down salaries and occupancy costs, will require more detail to explain how much money serves the organization’s mission and how much goes toward overhead. How not-for-profit executives allocate their time — from mission-critical services to administrative functions — can be subjective. The new reporting model changes will give organizations a chance to describe how they are allocating those costs.
Another change is liquidity measurement, which is both a qualitative and quantitative disclosure. It is qualitative in explaining how an organization regularly manages liquid resources and what financial assets it has on hand to fund operations for 12 months. The quantitative aspect is cash, receivables and investments, which are reduced for any restrictions to determine the net liquidity position.
The classification of net assets is another big change. Before FASB issued the new not-for-profit reporting standards, net assets were classified according to three categories: unrestricted net assets, temporarily restricted net assets and permanently restricted net assets. The new FASB changes collapse these three categories into two: net assets without donor restrictions (formerly unrestricted) and net assets with donor restrictions (which combined temporarily and permanently restricted).
Why change the reporting model?
Ultimately, the changes were made so that donors and stakeholders could get a better understanding of how funds are used in a specific organization and make better financial comparisons across organizations. Take, for example, a not-for-profit’s statement of functional expenses. Social services organizations were required to report functional expenses at a great level of detail, while other organizations, such as private high schools and chambers of commerce, didn’t need as much detail. The differences in reporting requirements made it hard for donors and other stakeholders to compare organizations across the not-for-profit spectrum. The FASB changes aim, in part, to create consistency while painting a clearer picture of how much money is allocated to an organization’s mission.
Generally, how are these changes expected to affect not-for-profits?
Not-for-profits will have the chance to provide more clarity around their expenditures with added disclosures and breakouts. Ahead of reporting, they should review how they are allocating expenses, so they can position their organization in the best light.
The most significant consideration will be liquidity measurements, as those who are looking at these numbers want to know how much an organization has on hand. This will help organizations demonstrate their short and long-term financial strength. The change gives organizations a chance to tell the whole story through liquidity measurements and breakouts. To the same end, it’s also worth having the organization’s board reconsider its reserve policies so that the policies do not reflect negatively on reporting.
What should not-for-profits do to adjust to the changes?
Talk to an accountant. Discuss liquidity measurements and how to best track and break out functional expenses. Update the terminology in financial statements to reflect FASB changes.
Rather than fight these changes, embrace them. The changes offer new opportunities for organizations to share the details of the good work they are doing. Ultimately, these changes should make financial reporting easier and clearer for readers, which can lead to more donor engagement.
For more information on FASB changes for NFPs, please contact a Clark Schaefer Hackett advisor.
© 2019 Smart Business Network Inc. Reprinted from the March 2019 issue of Smart Business Cleveland.