New Financial Reporting Changes for Not-for-Profits
As an up-and-running not-for-profit organization, it is imperative to stay informed of the changes needed on your financial statements. While the changes may initially feel overwhelming, they give organizations a great opportunity to better understand their own financial health, tell their stories externally and compare themselves to other organizations.
Below are the changes to not-for-profit financial statements that you should be aware of:
Net Asset Classes
What’s changing?
The new guidance requires a change in presentation of net asset classes on an entity’s financial statements from three net asset classes to two net asset classes.
- Old – 3 Net Asset Classes:
- Unrestricted
- Temporarily Restricted
- Permanently Restricted
- New – 2 Net Asset Classes:
- Presentation on the face of the Statement of Financial Position:
- Net Assets with Donor Restrictions
- Net Assets without Donor Restrictions
- Presentation of the face of the Statement of Activities the amount of the change in:
- Net Assets with Donor Restrictions
- Net Assets without Donor Restrictions
- Presentation on the face of the Statement of Financial Position:
Why the change?
Changing from 3 net asset classes to 2 net asset classes will improve the usefulness of information provided by donors, grantors, creditors and other users, as well as reduce complexities for preparers or users of not-for-profit financial statements. It will also eliminate the distinction between resources with permanent restrictions and those with temporary restrictions to reduce complexity.
To view an example of the updated financial statement, click here.
When is it effective?
This change will be effective fiscal years beginning after December 15, 2017. Early application is permitted and should be applied retrospectively.
What should you do?
Below are five proactive steps to help make sure your board understands the implications of the new financial reporting standard:
- Identify areas that will be affected
- Discuss the implementation plan
- Consider the cost
- Update and approve policies
- Review board of designations
Liquidity
What’s changing?
The new guidance requires disclosures regarding an organization’s liquidity on availability of resources. Both qualitative and quantitative information are required.
- Qualitative:
- Organization’s liquidity management plan
- How liquid assets are managed to meet cash needs for general expenditures within one year following the balance sheet date
- Quantitative
- Description of liquid assets at the balance sheet date and their availability to meet current year needs
- Availability of a financial asset may be affected by:
- External limits imposed by donors, grantors, laws or contracts
- Internal limits imposed by governing board decisions
Why the change?
Potential grantors and donors want to know that the organization’s they are evaluating have sufficient resources to meet financial obligations as they come due. This increases the transparency in financial statements and promotes a more thorough and accurate understanding of the organization’s ability to fund operations.
When is it effective?
This is also effective fiscal years beginning after December 15, 2017. Early adoption is permitted.
To view a Quantitative Disclosure example, click here.
To view the example in paragraph form, click here.
We understand that these changes may cause some confusion. If you have any questions, please contact Ryan Hynson, CPA, or Mike Smith, CPA, at (973) 328-1825.