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New Standards for Not-For-Profits Affect Several Major Areas

The Financial Accounting Standards Board (FASB) developed several new accounting standards in recent years. Regarding nonprofits, there are many areas that these new standards will affect moving forward. One new standard already being adopted by many nonprofit organizations is the new nonprofit financial statement format, ASU 2016-14.

This standard affects many areas including liquidity disclosures, rules for reporting expenses by function and nature, and condensing the number of net asset categories. Many preparers of financial statements for nonprofits are confused on the concept of net assets, especially how endowments are to be reported when they fall under an enacted version of the Uniform Prudent Management of Institutional Funds Act. Additionally, the cash flow statement has optional changes and investment returns must not include investment expenses when recorded.

Unlike the previous standard, nonprofits are now required to disclose expenses by function and natural classification. In addition, new requirements demand that there is more detailed information regarding the methods used to distribute costs among programs.

The new standard makes several changes to how certain expenses should be allocated:

  • Employees who directly supervise program staff should have their time allocated to program services
  • Information technology costs should be allocated across the functional categories, not just as a management and general expense
  • Employees who work in multiple functions should allocate their time across those functions. For example, a chief executive officer who spends time fundraising and in program service should have the time allocated to the respective function, and not just to management and general expense.

It is important to note that management and general costs are different from overhead costs and therefore should be reported separately.

Another area affected by the new standard is the liquidity and availability of resources. This will require a qualitative and quantitative disclosure. The qualitative disclosure explains how the nonprofit meets and/or manages its liquidity needs and “should report the financial assets available to meet general expenditures for the next 12 months.” Due to the broad definition of “financial assets available to meet general expenditures” there is likely to be much variation between organizations.

Revenue recognition will now be affected by two new standards: the ASU 2014-09 (ASC 606) and the ASU 2018-08. The first affects the method of recognition for most exchange transactions while the second will help distinguish between exchange transactions and nonexchange transactions and describe how to record these nonexchange transactions.

Lastly is the new lease standard provision, ASU 2018-11, that most leases will now be accounted for on the balance sheet as a right-of-use asset and a lease obligation. However, there will be no effect on short term leases (less than 1 year) and immaterial leases.

Over the past year, we have given presentations in-person and via webinar on the new not-for-profit standards and how to best prepare your organization. We will continue to host presentations on these topics, so be on the lookout for our next one!

For more information, consult a Certified Public Accountant here.

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