Substantial Accounting Changes Likely for Nonprofits

More than two decades have passed since nonprofit organizations have seen any significant changes to their accounting procedures. The well-known procedures will change if recently issued proposals by the Financial Accounting Standards Board (FASB) are adopted and implemented.

The new set of proposals, which includes major changes in the way nonprofit organizations present their financial statements, come after years of research by FASB’s Nonprofit Advisory Committee. As a result, the Board decided to move ahead with the issuance of an exposure draft, issued just last week with a comment period open through Aug. 20, 2015.

If the changes are indeed adopted, the presentation of nonprofit financials will look at the future of the organization in terms of liquidity and how cash flow is identified through operating, financing and investment activities.

Purpose

The underlying purpose behind the proposal is to allow those who use the financial statements of nonprofit organizations to better understand how the nonprofit uses its resources and exactly what resources are available to the nonprofit. Organizations will need to show they have sufficient liquid assets to meet their upcoming, future operational needs.

Proposals

The proposals fall into two categories: changes to the current net asset classification, and information required about an organization’s liquidity, financial performance and cash flows that nonprofits are required to disclose.

Net Asset Classifications

Unrestricted net assets would become “without donor restrictions.”
Temporarily restricted and permanently restricted net assets would be combined into a classification called “with donor restrictions.”

These proposed changes are meant to provide more robust disclosures around net assets related to the nature and timing and use of the funds; and to clarify what’s available for continuing operation and operating reserve, what’s being restricted by the donor and what’s being designated by the Board.

Re-characterization of Items on the Cash Flow Statement

Requires the direct method of cash flow for all nonprofits
Cash from interest and dividends that now is operating activity would change to investing activity
Interest paid on long-term debt that is now operating activity would become financing activity
Cash gifts and purchases of property, plant and equipment would be considered an operating activity

Nothing is Final: Engage in the Comment Period

I encourage you to take full advantage of the comment period to make your views known by Aug. 20, 2015. Simply link here for the FASB electronic feedback form. You may also email a letter to director@fasb.org, File Reference No. 2015-230.

FASB will take into consideration all comments it receives during the comment period to determine adjustments to or final adoption of these proposals.

Looking for more governmental and nonprofit accounting expertise? Contact Amanda James, CPA by calling (334) 887-7022 or by leaving us a message below.

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