The first major update to FASB’s not-for-profit accounting rules since 1993 presents challenges to the finance departments that will be implementing the new standard.
“For the next year or two, we will be immersed in figuring out pathways forward to making those changes,” Michael Forster, CPA, CGMA, the CFO of the Woodrow Wilson International Center for Scholars, said earlier this summer at the AICPA Not-for-Profit Industry Conference.
Accounting Standards Update No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities, requires changes that are designed to make it easier for financial statement users to understand not-for-profit financials. Issued last week, the standard reduces the number of net asset classes for not-for-profits from three to two and increases the disclosures not-for-profits are required to make about liquidity risks.
Implementation of the standard will require important analysis and decisions on the part of not-for-profit finance executives. There will be an opportunity for them to choose whether they want to disclose information about the function and nature of expenses on the face of the statement of activities or in the notes to the financial statements.
Not-for-profit CFOs also will have to decide whether they wish to use the direct or indirect method of reporting to present the net amount of operating cash flows. The new standard allows not-for-profits to use the direct method without reconciliation to the indirect method, which may make the direct method more attractive.
Here some of Forster’s tips for implementing the standard:
- Consider structure and resources carefully. With regard to where to disclose the function and nature of expenses, Forster advised CFOs to gather their teams and examine the structure of their financial statements and information systems—and how they capture data. That should help them decide how to report that information to conform with the new requirements. “There’s not a full-blown cookie-cutter approach to this,” Forster said.
- Carefully examine net asset reporting. Paring the net asset categories from three to two will require some changes, as will new disclosures on underwater endowments and board designations of assets. “You have donor-imposed restrictions, and they’re not all cut from the same cloth, so you’re going to have to understand what they look like and where this falls out,” Forster said. “… There is a lot of nuance that’s going to take place.”
- Size matters. Some very complex not-for-profits, which have multiple lines of business or wholly owned for-profits, already have complicated presentations and will need to figure out how to overlay the updated standards on top of their current reporting. Smaller not-for-profits may find things simpler but may have fewer resources to devote to implementation. “The work that will go into it will depend on the size and scale, how they do what they do, and the information technology infrastructure that underlies the systems that produce those deliverables,” Forster said.
- Keep the users in mind. “FASB is not doing this just because they want to do it,” Forster said. “I think they’ve heard enough feedback from the marketplace that they’ve said, ‘We have to help these organizations depict a financial profile that’s more easily understood.’ ”
The AICPA Not-for-Profit Section has information about the new standard and is developing resources, including a webcast on applying the new standard that is scheduled for Sept. 28.
—Ken Tysiac (ktysiac@aicpa.org) is a JofA editorial director.
