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Wednesday, April 6, 2016

Is Your Board Ready for a New Take on Your Financials?


Your board of directors and audit committee may soon be seeing your nonprofit’s financials in a whole new light, thanks to the Accounting Standards Update (ASU) currently under deliberation by the Financial Accounting Standards Board (FASB)

The update, Presentation of Financial Statements of Not-for-Profit Entities (Topic 958), represents the first overhaul of nonprofit financial reporting since Financial Accounting Standards 117 (FAS 117) was issued in the mid-1990s. At that time, FAS 117 itself was a significant change from previous reporting guidance.

The ASU under consideration includes several provisions that would significantly change current accounting and reporting guidance for nonprofits. (See call out below)

Rethinking Nonprofit Financial Reporting
The proposed accounting changes are being characterized as a “refresh” of the fundamental reporting model for nonprofits. Yet, in reality, they represent a conceptually different approach to how information is presented in nonprofit financial statements. In fact, FASB acknowledges that the new standards are reasonably different from current Generally Accepted Accounting Principles (GAAP)—and that initial compliance with the rules could be challenging.

Yet, the end result for users of your nonprofit’s financial statements is expected to be positive. In essence, the changes are intended to provide transparency across nonprofit organizations and show donors, board members (and potential board members), lenders and regulators how the organization operates—where your money is coming from and where it is going.

Action Steps
These changes, if enacted, will undoubtedly have a very real impact on your audited financial statements—as well as how you prepare for an audit. Practically speaking, your executive director, chief financial officer, and board members will all need to understand how these changes translate into the numbers they will see. With that in mind, consider these steps for getting everyone up to speed:

  • Review. Be proactive in reviewing and understanding the proposed guidance. Start by reading the exposure draft (www.fasb.org).
  • Identify. Included in the proposed standard are sample financial statements using the new reporting structure; work through the examples, as appropriate, to assess the impact on your organization.
  • Prepare. Consider preparing pro forma financial statements following the new rules to identify how the revisions may affect your organization’s effectiveness and fluidity on financial reporting.
  • Explain. If and when the accounting update is approved, early communication to the users of your financial statements can help set the stage for a successful implementation. It might be an e-mail from the executive director or even having your CFO take a few minutes at a regular board meeting to update everyone.
  • Train. Consider formal training for certain financial statement users, such as your board of directors, to explain the impact of the new reporting structure. Here, your CPA may be able to provide materials or even arrange for a webinar or PowerPoint presentation.

Improve the Usefulness of Your Financial Statements
In a world where stakeholders, the media and the public at large are demanding increased transparency and accountability, nonprofits may ultimately be well served by this new model of financial reporting. In the end, it will provide a better opportunity for them to see—and understand—details of your organization’s liquidity, financial performance and cash flows.

Armanino’s nonprofit professionals are following these developments from FASB, and will provide additional guidance as it becomes available. Contact our office for help understanding how these reporting changes will impact your organization.

The new ASU for nonprofit entities proposes the following:

  • Presenting net assets in two classes instead of three — “net assets with donor restrictions” and “net assets without donor restrictions,” essentially combining temporarily and permanently restricted assets
  • Additional disclosure requirements for those net assets WITH and WITHOUT donor restrictions
  • Presenting an intermediate measure of operations in the Statement of Activities. The presentation would also have an effect on the presentation of certain related cash flow components
  • Nonprofits would now have the option to use the direct method of presenting operating cash flows in the Statement of Cash Flows
  • Presenting expenses by both their functional and natural classifications
  • Disclosing how liquidity is managed and the organization’s time horizon to liquidity

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