Most of those in the not-for-profit accounting and governance world are aware of the upcoming changes to not-for-profit financial reporting due to the Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities, and may have even taken some training on the subject, or have had discussions with their external accountant.
These changes take effect for fiscal years starting after December 15, 2017, with early adoption permitted. However, the question that generally arises, is, how does this actually affect my organization and what should I do to prepare? This article helps answer that question, specifically related to what adjustments should be made to an organization’s chart of accounts during the upcoming year. The timing of the adjustments to the chart of accounts as well as the specific adjustments that will need to be made depend on the accounting system used by the organization. In addition, it is wise to discuss the timing and nature of the adjustments with your external auditor/accountant in order to keep everyone informed and to make decisions including if the upcoming year’s financial statements should be presented on a single-year or comparative basis.
The ASU will affect five areas: net assets, liquidity, investment return, statement of cash flows and expense reporting. The areas we will cover here are those that will be most broadly effected, which include net assets and liquidity.
The standard replaces the existing three classes of net assets (unrestricted, temporarily restricted, and permanently restricted) with two new classes of net assets – net assets with donor restrictions and net assets without donor restrictions. However, the standard requires note disclosure of the nature and amounts of restrictions and any endowment funds that are “underwater.” It also requires disclosure of quantitative and qualitative information about board designations on net assets.
The chart of accounts should be adjusted to combine the temporarily and permanently restricted net asset accounts. The most effective way to achieve this is by grouping both types of restricted net assets together so that they are combined for financial reporting purposes, but the information is still available regarding the nature of restrictions for internal management and reporting purposes as well as for disclosure in the notes to the financial statements. If the organization’s policy is to imply time restrictions for gifts of property and equipment, these balances will need to be reclassified to net assets without donor restrictions. In addition, if the organization has board designated funds, the first step should be to ensure the designations are still relevant and ensure there is a written policy on the initial classification as board designated net assets and their eventual use. Separate accounts should then be created for each designated class under net assets without donor restrictions, in order to ensure the information is available that will fulfill the disclosure requirements on board designated net assets.
The standard requires organizations to provide qualitative information on how it manages its liquidity and the associated risks. It also requires quantitative information regarding the availability of financial assets at the balance sheet date to meet cash needs for general expenditures within one year. The requirement for this quantitative information can be satisfied by disclosure of limitations on financial assets including their nature, external limits imposed by donors, laws or contracts, and internal limits imposed by governing boards.
The chart of accounts should be adjusted so that financial assets with no limitations, external limitations and internal limitations are all tracked separately. The degree to how this is tracked, whether in three large categories, based on limitation, or on a more granular scale, is a decision that should be given some thought. In addition, assets should be tracked by whether they are current or non-current in nature, which is most easily accomplished by how the assets are grouped in the accounting software.
The changes discussed above should be made in tandem, meaning that the effect on net assets and liquidity should both be considered before any changes are made, as these areas are directly related.
The changes that come with the new ASU will not have a great impact on how not-for-profit accounting teams handle underlying transactions. However, the financial reporting implications will affect almost every not-for-profit financial statement presentation. Now is the time to plan before the new rules go into effect.
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The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.