More than two decades after issuing rules and regulations for nonprofits on how to present and share their financials, the Financial Accounting Standards Board hopes to simplify things for these organizations, as well as their donors, by issuing new guidelines.
After years of study and outreach, the Financial Accounting Standards Board released new guidelines this week that simplify and improve how nonprofits classify their assets, as well as what they present in their financial statements.
FASB’s Accounting Standards Update (ASU)—the first issued in more than two decades—affects nonprofits of all kinds, including associations, universities, religious organizations, and charities.
“While the current not-for-profit financial reporting model held up well for more than 20 years, stakeholders expressed concerns about the complexity, insufficient transparency, and limited usefulness of certain aspects of the model,” said FASB Chair Russell Golden in a press release. “The new guidance simplifies and improves the face of the financial statements and enhances the disclosures in the notes—which will enable nonprofits to better communicate their financial performance and condition to their stakeholders while also reducing certain costs and complexities in preparing their financial statements.”
The ASU will give donors and other stakeholders a less-complicated view of an institution’s net assets, liquidity, cash flow, and overall financial performance.
These include qualitative and quantitative requirements in the following areas: net asset classes, investment return, expenses, liquidity and availability of resources, and presentation of operating cash flows.
One major change, for example, is replacing the existing three-class net asset system with a simpler, two-class structure. With the new classifications, nonprofits will differentiate net assets as having—or not having—donor restrictions. FASB officials hope this change will eliminate confusion that previously existed about how to categorize these sorts of assets.
According to FASB Board Member Larry Smith, the updates have been in the works for about six years, after the organization formed a committee specifically to look into accounting issues in the nonprofit community.
While existing rules and regulations seemed to work well, the committee found room for improvement, Smith said. To go back to the asset reporting change example, a nonprofit might have looked as though it was doing well on paper, but could not actually apply those assets as it wished, when it wished.
“A nonprofit might have seemed healthy, yet those assets were permanently restricted; they did not have the funds,” Smith said. “[The committee] felt there was some improvement that could be made there.”
To conduct community outreach and solicit feedback, the group held 10 workshops with preparers, met with stakeholders and industry groups, scheduled three roundtable discussions with experts, and held 25 meetings with various nonprofits. FASB also received more than 260 comments on its 2015 Exposure Draft.
The changes, which are posted on FASB’s website, are effective for annual financial statements issued for fiscal years beginning after December 15, 2017, and for interim periods within fiscal years beginning after December 15, 2018. However, early application of the ASU is permitted.
To help nonprofits better understand the changes, FASB is hosting a webcast on September 13. Smith and FASB staffers will take questions from participants about the new standards.