Beginning in 2018, a new accounting standard will go into effect for churches, charities, and other not-for-profit entities. The following is a summary of the major changes:
Net Asset Classifications
The existing rules require nonprofit organizations to classify their net assets as either unrestricted, temporarily restricted or permanently restricted. Moving forward, there will be only two classes: net assets with donor restrictions and net assets without donor restrictions. The new net asset classifications, along with the additional changes below, will make it much easier for investors and donors to understand how nonprofit organizations manage their funds, gifts and expenses. Nonprofits can also benefit from the new accounting standards as it can help increase accountability and asset allocation.
Other Major Changes
The new standard includes specific requirements to help financial statement users better assess a nonprofit’s operations. Specifically, organizations must provide information about:
- Liquidity and availability of resources. This includes qualitative and quantitative information about how they expect to meet cash needs for general expenses within one year of the balance sheet date.
- Expenses. The new standard requires entities to report expenses by both function (which is already required) and nature, in one location. In addition, it calls for enhanced disclosures regarding specific methods used to allocate costs among program and support functions.
- Investment returns. Organizations will be required to net all external and direct internal investment expenses against the investment return presented on the statement of activities. This will facilitate comparisons among different nonprofits, regardless of whether investments are managed externally (for example, by an outside investment manager who charges management fees) or internally (by staff).
- Presentation of net cash. The new standard allows nonprofits to use either the direct or indirect method to present net cash from operations on the statement of cash flows. The two methods produce the same results, but the direct method tends to be more understandable to financial statement users. To encourage not-for-profits to use the direct method, entities that opt for the direct method will no longer need to reconcile their presentation with the indirect method.
What Does This Mean?
Transparency. While ASU 2016-14 is the first major change to the accounting rules for not-for-profits since 1993, it is only the first phase of a larger vision. Donors, grantors, creditors and other users of nonprofit financial statements will have more insight into resources, cost allocation, general expense funding and more. Contact us for help preparing or evaluating an organization’s financial statements under the new standard.
Further Changes are Coming
While ASU 2016-14 is the first major change to the accounting rules for not-for-profits since 1993, it’s only the first phase of a larger project to enhance financial reporting transparency for donors, grantors, creditors and other users of nonprofits’ financial statements. Contact us for help preparing or evaluating an organization’s financial statements under the new standard.