New Rules to Enhance Transparency of Nonprofits' Governance

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By Denise Lugo

Aug. 18 — The first batch of substantive revisions in 23 years to the basic financial reporting model of not-for-profit organizations, to improve presentation and disclosure requirements, were issued by the Financial Accounting Standards Board.

“It gives greater information about the availability of resources, particularly the liquidity position of an entity,” FASB member Lawrence Smith told Bloomberg BNA. “It provides greater uniformity in terms of how entities are treating investment related expenses,” he said.

The Aug. 18 rules simplify the classification of net assets. They also require nonprofits to provide more information about liquidity and availability of resources and their expense structure.

Sharper Financial Picture

Though much won't change in accounting for nonprofits, the rules will provide donors, creditors and other financial statement users with a better financial picture of nonprofits' operations and financial condition, practitioners told Bloomberg BNA.

The guidance—ASU 2016-14—Not-For-Profit Entities (Topic 958): Presentation of Financial Statements of Not-For-Profit Entities—is applicable to all nonprofits that file financial statements in accordance with generally accepted accounting principles. These organizations include charities, religious organizations, private colleges and universities.

The rules become effective for calendar year 2018, but can be applied earlier. Companies can apply the rules for financial statements covering periods as early as June 2016—if they haven't yet been filed, FASB's Assistant Director Jeffrey Mechanick, who oversees the board's nonprofits' work, told Bloomberg BNA.

No Drastic Changes

There are about 1.5 million not-for-profits registered with the Internal Revenue Service. The revisions won't be a drastic departure from their current accounting requirements, but streamline what was already permitted, so nonprofits' statements are more easily understood, practitioners said.

“What this is doing is when you look at these financial statements and you're talking about presentation framework, you're talking about how organizations communicate their financial results and operations,” Lee Klumpp, assurance director in BDO's nonprofit and education practice told Bloomberg BNA. “The idea is 'what areas do we need improvement on to create clarity and relevance and better communication.' ” he said.

More Details About Liquidity

Much of the guidance is aimed at improving the reporting of information about liquidity and availability for spending of a nonprofit's resources. “Many not-for-profits present non-classified balance sheets—health care is an exception,” Martha Garner, not-for-profit leader in PwC's national office, told Bloomberg BNA in an e-mail. “And concerns have been expressed that the impact of limitations on use of assets or net assets may not be clearly apparent when that format is used,” she said.

The new rules will require all not-for-profits to clearly disclose the extent to which the balance sheet is comprised of financial assets, along with the extent to which those assets can be converted to cash within one year, and limitations that would preclude their current use.

Nonprofits must also disclose whether limitations on use are externally imposed by contracts, donor stipulations or legal or regulatory requirements, or imposed by a governing board and therefore capable of being reversed by board action. “Those disclosures can be provided on the face of the balance sheet, in the notes, or both,” said Garner.

Clearer Picture About Donated Funds

The rules also streamline and clarify the existing net asset categories by replacing the three current ones—unrestricted, temporarily restricted and permanently restricted—with two categories: with donor restrictions and without donor restrictions.

Nonprofits would emphasize in the notes distinctions as to when donor-restricted net assets can be expanded, if ever. Furthermore, the rules for underwater endowments—meaning deficiencies in endowment funds—and on lapsing of restrictions on gifts to acquire property, plant and equipment, provide more transparency about those items.

Reveals Expense Structure

The rules change how investment returns are presented to enable comparisons of returns among nonprofits regarding whether it manages its investments in-house or uses an external manager.

Furthermore, there are new requirements to reporting expenses. In addition to reporting expenses by functional classifications, that is, programs and supporting activities as is done today, nonprofits now need to provide information about expenses by natural classifications

“All nonprofits will have to provide an analysis of how the nature of their expenses—example, salaries and benefits, professional fees, rent or occupancy costs, utilities—relate to their functional classifications, example programs and support activities,” Garner said.

Moreover, nonprofits are encouraged—but not required—to use the direct method of reporting operating cash flows. “The actual effort involved in making the changes that the standard includes is not huge; it's not big—it shouldn't be expensive,” American Institute of CPA's senior technical manager Christopher Cole told Bloomberg BNA. “I think the impact will be positive across the board with the changes just because I think it'll improve the understanding of the not-for-profit's financial statements,” he said.

To contact the reporter on this story: Denise Lugo in New York at

To contact the editor responsible for this story: Ali Sartipzadeh at

For More Information

Text of the new rules is at

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