New financial statement standards have been issued for not-for-profit organizations and will go into effect for most organizations for their fiscal year ending in 2019. The purpose of these changes is to improve clarity, uniformity, and comparability of not-for-profit financial statements while providing improved information to users of the financial statements and allowing organizations to better tell their story. So, what are these changes and what can your organization do to be ready for them?
Primary Financial Statement Standard Changes
Reporting of net asset classes has been changed. Previously net assets were broken into three classes: unrestricted, temporarily restricted and permanently restricted. Under the new standard these classes are now with donor restriction and without donor restriction. These terms are used throughout the financials on the statement of net assets, the statement of activity, and throughout the notes to the financial statements.
Liquidity and availability disclosures are new required notes to the financial statement. These new notes require qualitative and quantitative disclosures about the organization’s financial policies and goals to meet current obligations, set up operating reserves, and the organization’s plan in the case of an unanticipated liquidity need.
Enhanced financial statement disclosures related to Board designated funds, restricted net assets, and underwater endowments. These additional disclosures will show how Board designations affect availability, how the organization manages liquidity with restricted net assets, and the effects of underwater endowment funds on the organization’s spending policies.
Expenses by natural and functional classification is now required to be presented in one location. Natural class is related to the type of expense it is, for example: salaries, maintenance, etc. Functional classes are related to which program or mission the expense is related to, for example: education, food service, etc. By providing both classifications in one location the user of the financial statements can easily see how resources are used to carry out the activities of the organization.
A reconciliation on the statement of cash flows to indirect method if using direct method is no longer required. This allows the organization to continue to use either the direct or indirect method to prepare the statement of cash flows that best serves their users of the financial statements and eliminates additional cost for a reconciliation that does not add additional value to the financial statements.
How to Prepare for These Changes
These new changes create a great opportunity for the Board to revisit and refocus financial goals of the organization. Below are some discussions the Board should be having before the preparation of the financial statements.
- Review current and long-term financial goals of the organization and refresh them if needed.
- Discuss how the organization manages liquid resources available to ensure that current obligations are met.
- Determine if the organization wants to adopt a formal liquidity policy or will it just be summarized in the financial statement disclosure.
- Review operating reserve and board designated funds to determine if they still make sense for the organization, and how they affect the organization’s liquidity.
- Determine how items such as depreciation, maintenance and interest expense should be allocated to functional classes. If this is already done, revisit the allocation and determine if it still makes sense.
- Determine which financial statement changes can be handled by management and which changes the organization will need outside help implementing.
If your organization determines it needs assistance implementing the changes or would like help facilitating a discussion with the Board, contact our non-profit experts and we can help with a smooth implementation.