By Carl Blankschaen, CPA
Audit and Assurance Senior

If you are one of the countless professionals serving a non-profit institution, you have no doubt heard the buzz surrounding financial reporting and how all non-profit organizations will now have to make an adjustment in the way in which they report.

The Financial Accounting Standards Board (FASB) recently issued their exposure draft on Presentation of Financial Statements for Not-for-Profit Entities.  This exposure draft will make drastic changes to the financial statements of all Non-Profit organizations, and will consequently require changes in the recording of accounting information throughout the year in order to prepare the financial statements at the end of the year. What does all this industry talk mean for your non-profit?

While this proposed change affects numerous areas of the financial statements, some of the most significant changes, and their impact on your non-profit, are outlined below:

Net Asset Classes and Liquidity

• The exposure draft now classifies all net assets into two categories:
  • Net Assets with Donor Restrictions
  • Net Assets without donor restrictions (includes Board designated net assets)
  • Underwater endowment funds would be included in net assets with donor restrictions instead of the current unrestricted net assets
  • New liquidity disclosure required in the footnotes
    • Time Line organization uses to manage liquidity
    • Total assets available to meet cash need within that time line
    • Total liabilities due within that time line
    • A Qualitative description on how the organization manages its liquidity (policies for liquidity reserve)
    • Qualitative and quantitative information on board-designated net assets
      • Changes due to designation
      • Purpose and amounts of those transfers

It is important to note while temporarily and permanently restricted net assets no longer would appear on the statement of financial position, each still must be tracked internally to properly calculate the total restricted net assets the organization has. 

For the new liquidity disclosure, non-profits should consider documenting a time line it uses to measure liquidity, describing its policy and strategy for managing its cash flows (months, years, etc.).  If not done so already, a list of current assets and should be perpetually maintained and monitored to both comply with this requirement, and to monitor the organization’s liquidity.

Statement of Activities

• Adds a subtotal for changes in net assets without donor restrictions
  • Requires current period operating excess or deficit
  • Inflows and outflows of resources in the changes of net assets without donor restrictions must be classified by:
    • Organization’s mission
    • Are they available for current period
    • Activity now classified as either Operating or Non-Operating
      • Classified as Operating if they relate to carrying out the organization’s purpose
      • Classified as Non-operating if they relate to:
        • Investing or financing activities
        • Board actions that restrict or make available resources for operations in the current period
        • New Subtotals
          • Operating Excess or Deficit  Before Internal Transfers, If Any
            • Reflects all current and legally available amounts generated or used in operations for the period
• Operating excess or deficit after internal transfers
  • Example: A board decision to create a quasi-endowment would be a transfer out of operating net assets without donor restrictions and an offsetting transfer into non-operating net assets without donor restrictions.

An important take-away from the proposed changes to the statement of activities is for non-profits to begin segregating costs now between operating and non-operating costs if they are not already doing so.   Additionally, it would be a good idea to review the organizations restricted net assets for amounts that were designated as restricted by the board, and segregate those in a separate tracking record.

Reporting on Other Activities – the following are some of the more significant classifications between the operating and non-operating section of the statement of activities:

• Depreciation now an operating expense
• Interest is non-operating expense
• Investment expenses are netted with related investment return in appropriate class of net assets
• Donated PPE with no time restrictions moved out of Net Assets with Donor Restrictions, and into the operating section of net assets without donor restrictions when they are placed in service

Statement of Functional Expenses – Under the proposal ALL nonprofits must now include information on the nature and function of their expenses, not just health and welfare nonprofits.  While the specifics have not been set, the most likely method of presenting this will be in a statement of functional position, or a table in the footnotes.

Statement of Cash Flows

• NPO’s now must use the direct method to report operating cash flows
  • If you are unfamiliar with the direct method of the statement of cash flows, your accountant can explain the differences in how the information is presented, along with what information will be needed.
  • Reconciliation of net income to cash flows from operations would be optional under the proposed guidance
  • The proposed draft outlines how the following items shall be classified on the statement of cash flows:
    • Purchases and sales of long-lived assets and contributions of restricted for purchases of long lived assets are now considered operating cash flows
    • Interest and dividends received would move from operating to investing
    • Interest payments on long term debt would move from operating to financing

Enhanced Disclosures – The following are additional disclosures that would be required to the financial statements under the exposure draft:

• Composition of net assets with donor restrictions
  • How the restrictions affect the use of resources
  • Methods used to allocate costs among program and support functions
  • Underwater endowment funds
    • The total of the original gift amount (or level required by donor)
    • Governing board policies or decisions to spend or not spend the funds

If your non-profit has not explicitly broken out and details the above information for restricted net assets, as well as how costs are allocated between programs, now would be a good time to do so.  The process may take a while and lead to lengthy discussions and/or research, so preparing before these changes go into effect will not only increase the accuracy of your organization’s information now, but will also better prepare it for the anticipated changes of this exposure draft.

The changes in reporting can be confusing and we’re ready to help you understand these changes and how they affect your organization. For more information on the draft changes or if you have questions regarding this topic, please contact me at cblankschaen@zinnerco.com or 216-831-0733.

Carl is a member of the firm’s Audit and Assurance service team, helping businesses and non-profit organizations structure and comply with a variety of federal, state and local filing and reporting requirements. 

When he’s not serving those who serve others, Carl can be found pounding the pavement through his love of running or pounding his fists in the air as a faithful fan in the Dawg Pound.