Applying New Nonprofit Rules Could Get Tricky Sometimes

Though the new not-for-profit accounting standard the Financial Accounting Standards Board issued Aug. 18 isn’t expected to be difficult to apply, we heard there are a couple of areas that might be challenging for some not-for-profits, depending on what they’re reporting now.

The rules apply to all not-for-profits that file generally accepted accounting principles (GAAP) financial statements, including charities, religious organizations, colleges and universities, among others.

“Some organizations don’t report expenses by function and nature,” FASB Assistant Director Jeffrey Mechanick told Bloomberg BNA Aug. 17.  “And the analysis of the two in one place--for some that could be a little bit of a challenge the first year,” he said.

Requires Detailed Analysis of Expenses.

Mechanick was referencing the new requirements for reporting expenses. In addition to reporting expenses by functional classification as is done today, nonprofits will now need to provide information about expenses by natural classification.

They’ll also have to provide an analysis of how the nature of the expenses relate to their function.  For example: how items like salaries and benefits, professional fees, rent or occupancy costs and utilities relate to the not-for-profit’s programs and supporting activities.

Going forward, however, that analysis should be relatively easy, Mechanick said.

Not Hard to Implement.

The other area that could create some work, especially in the first year of adoption, said Mechanick, is the additional disclosure requirements on liquidity and the availability of resources—“again depending on the not-for-profit and what they’re already reporting.”

Overall, the standard won’t be difficult to apply and won’t have significant ongoing cost, said FASB member Lawrence Smith, who also spoke with Bloomberg BNA Aug. 17. 

“The information is available for not-for-profits and I don’t think there are many fiscal changes,” he said.

Smith said the rules will bring greater transparency to the reporting in areas like what’s restricted versus nonrestricted, the availability of resources--particularly the liquidity positon, among other areas. “These liquidity disclosures were created in order to make it more evident as to what an entity can and cannot spend,” he said.

Can be Applied ASAP.

The rules—which address presentation and certain disclosures—are the first batch of changes to the nonprofit financial reporting model in 23 years.

Interestingly, though the rules take effect for 2018 calendar years, if for some reason a nonprofit hasn’t yet filed its financial reports this year, they can apply the rules to their June 2016 statements.

The guidance is expected to be a partial answer to some of the troubles donors experienced when some of their favorite charities tanked without clear warning, some practitioners say.

Donors want to know sooner—rather than later—whether an organization is able to meet its budget expenses, how it’s spending its endowment funds, how it manages investments, what types of expenses are being racked up and are they being met, among other items. 

These rules might bring some reassurance.

Continue the discussion on Accounting for Nonprofits at Bloomberg BNA Accounting LinkedIn group.