Significant Accounting Changes in the Works for Nonprofit Accounting

More than 20 years have passed since any major changes in accounting procedures have been implemented for nonprofit organizations. That trend is about to be reversed, if recent proposals are adopted.

Recently, the Financial Accounting Standards Board (FASB) unveiled a set of proposals that include major changes in the way nonprofit organizations present their financial statements. This follows years of extensive research conducted by FASB’s Nonprofit Advisory Committee. As a result, the Board decided in April to move forward with the issuance of an exposure draft, issued April 22, with a comment period open now through August 20, 2015.

If the changes are indeed adopted, the presentation of nonprofit financial statements will do a lot more than focus on history; they 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

Whether you agree or disagree with the proposed changes, we 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 [email protected], 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.

You are also welcome to call Smith and Howard to discuss how these changes might affect your nonprofit organization. Call Sean Taylor, CPA, at 404-874-6244 or email him at [email protected].