We often gauge things by where they fall on the timeline of our careers. With that in mind, when I stop to consider that the current model for not-for-profit (NFP) accounting has already been around for 20 years, I start to feel … well … OLD!
But change is coming, and they may help shine some light on the way NFPs classify their donations. These changes are also expected to clear up some other reporting concerns.
What to Expect
The Financial Accounting Standards Board (FASB) recently issued an exposure draft of proposed new standards that will bring about some significant changes in our industry; and there has been some speculation that these changes may take effect as early as next year. In any case, here is a brief overview of what you should expect once the standards are approved.
The new standards would replace the current three-class regime (permanently restricted, temporarily restricted and unrestricted) with two-class net asset reporting: Net assets with donor restrictions, and net assets without donor restrictions. This change is expected to clarify which assets can be redirected and which ones should be left alone per legal restrictions put in place by donors. This change will also allow organizations to reflect expenditures of permanently restricted funds below their initial gift – now allowed by law if prudent. Previously, these negative fund balances were supposed to be reported as unrestricted, which resulted in a confusing and somewhat misleading presentation of funds.
The proposed changes will also affect the Statement of Activities by requiring a presentation of operating results to be independent of items such as investment performance. Functional expenses will also be required by all NFPs, not just voluntary health and welfare entities as required today. The good news is that most organizations are already reporting this information on their Form 990, so this change shouldn’t be difficult to implement.
Finally, if approved, the proposed new changes will impact the statement of cash flows. Your organization will be required to use the direct method of presentation as well as reclassify certain transactions between cash from operating, financing or investing activities.
NFP leadership teams should review these proposed standards in more detail and begin to think about what changes in software or information gathering procedures are in order. At first glance, these proposals look like they will be beneficial for users, providing a bit more clarity and logical presentation. But as with any change, some cost and time will be required to make the transition.
Email Rea & Associates to learn more about how these proposed new standards will change the way you report your organization’s financial information and what you can do now to prepare for implementation of these changes.
By Todd Mizer, CPA (New Philadelphia office)
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This article was originally published in Money & Management, Rea & Associate’s Not-For-Profit newsletter.
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