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Nonprofits operate under accounting standards governed by the Fiscal Accounting Standards Board (FASB). In that location are several new standards effective for fiscal years starting after December 2017. This article focuses on the new guidance found in FASB Bookkeeping Standards published in the Update 2016-14 (Topic 958), Presentation of Financial Statements of Non-For-Profit Entities.

See also: Accounting Standards Update 2018-08—Not-for-Profit Entities (Topic 958): Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Fabricated.

To help us understand three significant changes contained in these new standards, nosotros asked Curt Klotz, the VP of Finance and the Chief Financial Officer at Propel Nonprofits, in Minnesota, to provide an overview of the new bookkeeping standards and share some practical examples of how the new standards will testify up on nonprofit financial statements. Brusque'southward overview focuses on: (1) restricted and unrestricted net assets; (2) liquidity disclosures; and (3) functional expenses. Nosotros have also included a list of resource near the new FASB standards and related topics at the end of this overview.

Which nonprofits need to pay attending to these new FASB standards and why?

Short Klotz, V P of Finance and Chief Fiscal Officer at Propel Nonprofits: All of what I'thou nearly to describe about the new FASB standards for the reporting of nonprofit financial statements applies to the presentation of nonprofit audits. Whether a nonprofit is required to take an independent audit or fifty-fifty certified financial statements prepared each year depends on many factors. Each state has its own regulations that gear up dollar thresholds for when a nonprofit must be audited. (See the National Council of Nonprofits' Nonprofit Inspect Guide for more information and links to states' requirements.) Some funding sources, such equally a individual foundation, or even a local, state, or the federal government, may require nonprofits to submit an audit. The changes described here utilise to audited financials, just they tin can be useful to other nonprofits every bit well – certainly for those nonprofits that may be approaching the need for an inspect in the near future. Nosotros hope nonprofits will use their financial statements (audited or not) to help tell their mission and program stories. Well-presented financials simply reflect a nonprofit's mission in another language. So nonprofit staff need to acquire the new standards well plenty to be able to implement them in a way that tells their nonprofit'due south story effectively.

1. Restricted and Unrestricted Net Assets

How exercise the new accounting standards assistance a nonprofit tell its story nearly funding that is restricted for some specific use?

The new FASB standards changed the terminology we use to describe "restricted" contributions. Going forward there are two categories: avails "without donor restriction" and assets "with donor brake." As we know, the ability for donors to place restrictions on the purposes - or on the time period - their donation can exist used, is what makes nonprofit accounting unique – and complicated. For example, if your organisation operates three programs and a foundation gives it a grant of $50,000 for program A, your organization has to ready up accounting systems that are sophisticated enough to prove that it spent $50,000 on plan A. Too, if a donor gives your system a gift specifically intended for a employ that will be carried out at a future time, say in your side by side fiscal yr, then your arrangement'south accounting system needs to be able to show that the system did not spend that money until the proper time menstruum.

The procedure for moving funds from the "with donor brake" category to the "without donor brake" category is referred to as "releasing (funds) from brake." You volition oft see a line item called "Revenue Released from Restriction" or "Net Assets Released from Restriction." This means money that came in with a donor restriction has at present either been used for the purpose the donor intended or inside the time period designated.

In the nonprofit earth, nosotros may sometimes receive gifts from donors that are intended to be held forever, like endowments or scholarship funds. The purpose of these gifts is to create a fund or pool of money that generates income through investment. The system is gratis to utilize the earnings that come up from the assets that are invested, but to honour the donor'south intent, the nonprofit must hold the original souvenir forever. (Y'all'll hear the phrases "in perpetuity" or "perpetual in nature" to describe this kind of restriction.)

No matter what kind of brake a donor might impose, FASB standards require nonprofits to study finances in a way that makes it clear which funds have donor restrictions and which funds come up without donor restrictions. Before these new FASB standards, at that place were three categories: "unrestricted," "temporarily restricted," and "permanently restricted." The new terminology moves us from three categories to two categories when displaying financial statements.

What will we see now on a nonprofit's financial statements in connection with restrictions?

The new terminology asks us to list those revenues, funds, or net assets that do not have donor restrictions every bit "without donor restrictions," and those that are restricted every bit "with donor restrictions." A nonprofit can show these categories on its financial statements by having separate columns for "without donor restrictions" and "with donor restrictions." Or a nonprofit can make a distinction between the two by showing split line items in the revenue department of the Statement of Activities (the argument that shows a nonprofit'southward revenue and expenses) or in the internet asset section of the Argument of Financial Position (the statement that shows a nonprofit'south avails, liabilities, and net assets – also called a "residue sheet"). In my feel, using columns is a lot clearer and more useful for seeing what kind of action and resources an organization has at its disposal. I recommend columns over line items.

And fifty-fifty though we can combine all the funds "with donor restrictions" into the same column - or onto the aforementioned line detail - on the financial statements, we still have to disclose a detailed breakout of the dissimilar kinds of restrictions in the notes to our audited fiscal statements. Our bookkeeping life doesn't get any easier with the new standards. The change is primarily intended to benefit the readers and users of the nonprofit'south financial statements.

What about contributions that a donor may intend to restrict into perpetuity?

Nonprofits demand to be aware that the move from iii categories to two categories does not allow united states to finish tracking those funds that a nonprofit receives from donors who enquire us to concur their gift in perpetuity. The nonprofit still has to go on track of its endowment or scholarship funds separately from those funds that are restricted in other means.

What are practical ways nonprofits document donor restrictions?

The best way to certificate donor restrictions is to retain whatever correspondence your arrangement received when it was notified of the souvenir. The award letters or grant agreements or fifty-fifty the notes on a contribution envelope are all evidence of the donor's intent for how your organization is expected to use the coin. Be aware, besides, that the language your arrangement uses to solicit contributions can be construed to place a restriction on a donor'southward gift. If your fundraising appeal highlights one of your projects or programs very specifically, you may exist inadvertently restricting whatever gift sent dorsum to you in response to that entreatment. It'southward all about being clear what you are asking for and being clear what the donor intends. [Note: Some nonprofits use "souvenir intent forms" to analyze restricted or unrestricted gifts that ask donors to depict, or check a box directing the nonprofit how to use their souvenir. I of the options tin exist: "Please use this souvenir wherever there is the greatest need" or some like language that gives the nonprofit discretion over the employ of funds. That course could likewise be used to verify whether the donor wishes to remain anonymous or not.]

How are board designated assets handled on fiscal statements under the new standards?

Boards are able to prepare aside certain funds the organisation receives (or has congenital up over time) by designating that the funds but be used for specific purposes. Examples include establishing a lath-designated reserve for emergencies. Or the board may exist planning a program expansion, or merger in the future, and may designate funds for that purpose. Information technology is sometimes strategic for a board to make such a designation and brandish it on the fiscal statements. It shows a commitment to a certain program or program or strategy. But there is a difference between these designated funds and funds the nonprofit receives that come with donor restrictions. Board-designated funds are actually funds without donor restrictions. Considering it was the board that decided to set these funds aside for a specific utilize or to be used at a specific time, the board could merely as easily modify its mind and vote to free up the funds or change the purpose of the designated funds. This is different from restriction imposed by a donor. The nonprofit is legally obligated to honor the donor's intent, but since the lath tin can change its listen well-nigh its own designated funds at any time, those assets are still portrayed in financial statements as "without restriction."

2. Liquidity Disclosures

How are nonprofits required to disembalm information almost their cash flow/liquidity in their financial statements?

The concept of liquidity is very important for nonprofits to understand. Information technology is sometimes a shock for an organisation showing a positive bottom line to find out information technology doesn't take enough greenbacks in the banking concern to make payroll. There is a big departure between when the nonprofit has to report it "accrues" acquirement and expenses, from when those revenues and expenses actually hit the nonprofit'southward bank account. For example, when a nonprofit receives the always wonderful letter from a foundation awarding a $25,000 grant, it is proper accounting practice to book that amount as grant revenue on the appointment the alphabetic character is received even though the nonprofit may not receive the money for a week or so (or longer). The grant is booked every bit a "receivable," pregnant the nonprofit hasn't received the cash yet, but information technology even so goes on the Statement of Activities equally grant "revenue." But since the nonprofit hasn't received the actual check or wire for the corporeality still, it doesn't have that cash in the banking concern available to pay its bills. If the nonprofit doesn't have any other reserves in the bank or extra money from some other activity, then the nonprofit might still be in rough shape even though a financial report shows that the nonprofit just received a $25,000 grant!

This is why tracking and disclosing liquidity is and then important. Liquidity refers to those financial resource available for use in the near future. The FASB standards ask nonprofits to both listing the quantitative measures of their liquidity (financial resources available for use within the next year) and the qualitative measures (how the nonprofit manages and monitors its liquidity). So, to satisfy the new FASB standards, nonprofits need to disclose what resources they have on hand that could be used to cover expenses and other obligations within the side by side year. The nonprofit should also disclose how it defines what resource it can employ and how it monitors the state of those resources. The list of available resources includes the obvious, like cash (that is, cash without donor restrictions) and certificates of eolith that will be paying out within the next yr. Other available resources might include receivables like grants or client fee payments likely to exist collected inside the side by side twelve months. The grant of $25,000 that I used every bit an instance might be considered available resources if the actual check or wire is expected to be paid to usa inside the twelvemonth.

1 less obvious available resource might exist a line of credit your organization draws funds from in the grade of a short-term loan if greenbacks gets also depression. Some other source of available funds might be those grant funds with donor restrictions that you anticipate will be released from restriction inside the year. While currently restricted by the donor, if you know your nonprofit volition be doing the project or program within the next twelve months, so y'all should include that amount of project funding every bit available for utilise within the same period. If you are reasonably certain that the donor restriction volition exist satisfied, then you tin make a case that the money should be considered available.

Deciding on a liquidity measure that fits your nonprofit is an important pace towards financial health. Even though FASB requires that the liquidity disclosure show what is available within the next twelve months, it might brand more than sense for your organization to pay attention to the side by side 90 days. Information technology all depends on the normal bicycle of your receivables. By this, I mean the regular blueprint of when yous receive payments. For example, if your organization receives a large portion of its revenue from a government agency that takes 90 days an average to process reimbursement requests, then you might consider establishing liquidity measures based on a 90-24-hour interval cycle. Sharing this in your fiscal statements will give the readers of your statements confidence in how stable your organization is and how well you can expect to meet immediate financial needs. Looking at liquidity is also a very important strategy for your arrangement's leadership. Leadership is always ameliorate off knowing the truth about your fiscal condition well alee of any potential issues. It is easier to survive tough times if board and staff members are expecting them and can accept proactive steps to change course.

3. Presentation of Expenses

How do the new standards affect the way a nonprofit will be describing its functional expenses on its fiscal statements or in the notes – and how do you see this helping people understand the true toll of a nonprofit'southward operations?

FASB's new standard on functional expenses is really just a alter in how much detail nonprofits must provide about their expenses. For those organizations that are required to carry an independent audit, the requirement to interruption out organizational expenses into functional categories –plan services, management and general (besides called administration), and fundraising – are non new.

The new standard requires nonprofits to interruption out their expenses non but by the 3 functional areas, but likewise past their "nature" (think of this as line items). "Nature" merely means that we have to list what specific line items we spent the coin on within each of the larger functional areas. For example, nonprofits are at present required to break out expenses into line items similar salaries and other personnel expenses, occupancy expenses like rent or mortgage interest, or travel expenses. Many nonprofits already do this every twelvemonth when they file the full IRS Form 990, and then requiring this level of particular is not necessarily annihilation new.

However, the functional expense statement is ane of the most often misunderstood and misused pieces of financial information that nonprofits are required to disclose. Many nonprofits are enlightened of the "overhead myth," the belief that nonprofits with lower operating costs are more than constructive. Besides often donors, investors, and the public take used the information on the functional expense statement of a nonprofit's audit or Form 990 to judge whether a nonprofit is efficient or constructive in its use of donated dollars to perform its charitable mission. The manner this is often decided is to calculate what percentage authoritative and fundraising expenses are of the full expenses of an organization. While seeking to know if a nonprofit is effective in carrying out its mission is a perfectly valid and worthy question, the functional expense ratio has not been shown to actually correlate to an organization's mission or financial success. That's why information technology's now considered a myth. Still, many people keep to believe the functional expense ratio is a relevant manner to compare nonprofits. In fact, there is no proven relationship between the ratio and any of the mission effectiveness or fiscal efficiency that donors and the public have been led to believe.

If nosotros are being required to report a measure that neither accurately predicts nor reflects the mission or financial success of our organizations, we should at to the lowest degree detect a way to make information technology useful. To that finish, nosotros recommend going one step farther with the functional expense argument that is required by FASB. Without causing your auditors any upset, yous tin add supplemental information to your inspect. This is unremarkably in the course of extra financial statements or reports or notation disclosures that come at the end of the audited financials. Instead of showing the nonprofit's program services lumped into 1 column next to a cavalcade for administrative expenses, and a cavalcade for fundraising, you could interruption out each of the specific programs into a separate column. This assumes your organization has more than ane program area (and many do).

Next, your organisation could choose a reasonable method for allocating the authoritative expenses and the fundraising expenses to each of the program areas you lot just broke into columns. Some common allocation methods are FTEs, percentage of direct expenses, or for the fundraising expenses yous could utilize the percentage of contributed revenue in each programme. Allocating administrative and fundraising expenses out to each of the program areas gets us to what nosotros call the "True Program Costs" of each of these programs. This shows how much information technology really costs to provide the services or programs of your organization. This is a much more appropriate, strategic, and useful manner of looking at the functional expenses of a nonprofit.

Core Mission support In the by year, Propel Nonprofits has taken this True Program Costs idea out to the world in a weblog that I wrote called A Graphic Re-Visioning of Nonprofit Overhead. In the blog, I signal out that the old way of looking at functional expenses left us with the unfortunate pie chart that shows a nonprofit'south authoritative and fundraising costs equally a slice out of the pie. Using this image can only pb to us thinking that administrative and fundraising costs are bad and need to be kept to a minimum. In my weblog, I created a revolutionary new visual representation that puts the administrative and fundraising costs at the centre of the nonprofit structure. Those expenses that used to be vilified every bit diminishing the whole pie are now considered Cadre Mission Support. Having good organizational infrastructure in the course of solid financial bookkeeping, good lath governance, innovative fundraising staff, and state of the art technology is seen as a heave to mission effectiveness and impact – non a drag on a nonprofit's success.

Are the new FASB standards a positive modify?

With all of these new FASB standards, information technology's non and so much whether I think the standard is positive or not. In fact, I'k neutral on the change in terminology for restricted contributions, I'g positive about the change in liquidity disclosure, and I'yard negative about the increased focus on detail in the functional expense statement. What I most want is for nonprofits to know that their financial statements are their own. Even within the bounds of FASB standards, nonprofits should learn how to use their financial statements and the note disclosures that are part of them to tell their ain particular mission story to expert cease. Many nonprofits don't realize that their audited financial statements are supposed to be produced by the nonprofit staff, not the auditors. In practise, too frequently nonprofits are deferring to their auditors nearly how to display the numbers and how to write the notes.

For more slap-up information from Curt and his teammates at Propel Nonprofits, visit world wide web.propelnonprofits.org and follow @PropelNP

Resource

Update 2016-14: Not-For-Turn a profit Entities (Topic 958): Presentation of Financial Statements of Not-For-Profit-Entities (FASB)
Update 2018-08—Not-for-Profit Entities (Topic 958): Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made. (FASB)
What are the new significant changes required by FASB for nonprofit fiscal statements? (Interview with FASB)
Chart/Summary and implementation guide for new FASB requirements (FMA)
Webinar: Overview of FASB changes that affect preparation of a nonprofit's fiscal statements (W Virginia Nonprofit Association)
New Liquidity Disclosures for Not-For-Profits: Are You Ready? (AICPA)
Preparing for the One Big Modify in Nonprofit Fiscal Reporting per FASB (liquidity disclosure) (Nonprofit Quarterly)
Is your organization prepared for the new liquidity disclosures? (Raffa)
FASB's New Financial Reporting Rules for Nonprofits – What you need to know (National Quango of Nonprofits)
Functional Expense allocation for nonprofits later FASB ASU 2016-xiv (Yeo & Yeo)
Truthful Program Costs: Program Budget and Allocation Template and Resource (Propel Nonprofits)
A graphic revisioning of nonprofit overhead (plus "Core mission back up" graphic) (Propel Nonprofits)
Gift acceptance policies (National Council of Nonprofits)
Operating reserves for nonprofits (National Council of Nonprofits)