Attention Non Profit Executives

Scott M. Sachs of CohnReznick LLP on analyzing the newly arrived financial reporting standards and its effects on investments

October 11, 2017

One of the more demanding and time-consuming aspects of overseeing a not-for-profit organization is the requisite annual financial statements provided to donors, grantors, creditors, governing boards, and other stakeholders. The purpose of this financial reporting is to present a clear picture of a not-for-profit’s liquidity, financial performance, and cash flows—in other words, to communicate if the organization is in sound or poor financial condition.

The reporting model from the Financial Accounting Standards Board (FASB) has been in place for more than 20 years. During that time, not-for-profits have used different methods of conveying their financial results because the existing Generally Accepted Accounting Principles (GAAP) did not establish a specific way of reporting operating performance.

Enter Accounting Standards Update ASU-2016-14.

Issued in 2016, Presentation of Financial Statements of Not-for-Profit Entities establishes a new, uniform protocol for classifying net assets and preparing financial statements. The provisions of the update are effective for annual financial statements issued for fiscal years beginning after December 15, 2017, and for interim periods within fiscal years beginning after December 15, 2018. This is just the first part of a two-phase project that will require greater specificity in the way not-for-profit organization financials are reported.

[To read more of Scott M. Sachs’ thought leadership click here]

More Detailed Information Improves Transparency

ASU-2016-14 runs more than 250 pages. But it is really not as imposing as it may seem. And it’s an update, not a complete overhaul. At a time when calls for greater transparency in financial reporting are at an all-time high, the new standard is long overdue for many financial statement users. Here are some of the key changes:

1. Improved disclosure and presentation of net asset classes

Three classes of net assets will be reduced to two: net assets without donor restrictions and net assets with donor restrictions. Organizations will still need to disclose the nature and amounts of all donor-imposed restrictions but will also have to disclose the amounts and purpose of all board-designated net assets.

In what may be among the most challenging among the newly required disclosures, not-for-profits are now required to provide both quantitative and qualitative information relative to liquidity risk and management of liquid resources.

2. Enhanced information on liquidity and availability of financial resources

In what may be among the most challenging among the newly required disclosures, not-for-profits are now required to provide both quantitative and qualitative information relative to liquidity risk and management of liquid resources. This information will communicate the availability of financial assets to meet cash needs for general expenditures within one year of the statement of financial position date.

3. Greater detail on expenses and expense allocation

All organizations will be required to present expenses by function and by natural classification. This information must be shown in one location within the financial statement or its notes and it must include qualitative disclosures about the methods used to allocate costs among program and support functions.

4. Enhanced reporting of investment return

A presentation of investment expenses versus investment income will be required on the face of the statement of activities.

Next Steps: Planning Is Key

CohnReznick has been preparing our not-for-profit clients for ASU-2016-14 since it was first announced last year. With the compliance deadline fast approaching, not-for-profit executives who have not done so already should educate their organizations’ board members, bankers, donors, and other stakeholders about the new standard and its enhanced reporting requirements.

Within the organization, financial executives and others should develop a comprehensive implementation strategy that includes training key personnel, reviewing and making any needed changes to pro-forma financial statements, and preparing the necessary disclosures pertaining to the organization’s liquidity.

[For more on Cohn Reznick’s approach to Accounting click here] 

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