What Should Independent Schools Know about Recent Changes to Financial Accounting Standards for Nonprofits?
One way independent schools and other nonprofits communicate with donors or other stakeholders is through their financial reporting. Sound accounting practices result in financial reports that signal responsible stewardship of donations, tuition or assets in the service of the organization’s mission. New guidance on financial reporting for nonprofit organizations was released in August by the Financial Accounting Standards Board (FASB) and it has created quite a buzz.
The changes to the FASB guidance – the first update in more than a decade – aim to simplify and improve financial statements to help nonprofits better communicate their financial performance to donors, grantors, management and other users. It is hoped that greater transparency in financial reporting will help Boards and staff be more strategic in their financial management.
The major changes include:
- Net assets will now be presented in two categories—net assets WITH donor restrictions and net assets WITHOUT donor restrictions—instead of three. This will simplify the presentation of the statement of activities (two columns vs. three) and will feature more robust footnote disclosures about the types of donor-restricted net assets.
- Liquidity disclosures will help users better understand the financial health of an organization. Nonprofits will disclose the cash or cash-equivalents they have on-hand in both quantitative and qualitative In other words, how much of the cash-on-hand can be spent freely during the following year, and how the nonprofit manages its liquid resources to meet its cash needs for the coming year. Schools, for example, may report a large unrestricted net asset balance at the end of the fiscal year, but this may be due to property and equipment or restricted collateral, all of which are non-liquid assets.
- Independent schools typically do not report expenses by function AND nature. However, the new guidance requires organizations to report and show the relationship between functional expenses (program, management, fund raising, etc.) and expenses by their nature (salaries, benefits, etc.). Presenting both classifications will help users understand how resources are used to support programs and activities.
- Cash flows may be presented using the direct or indirect method. With the direct method, organizations no longer have to reconcile changes in net assets to cash provided by operating activities.
- Investment return will be presented net of all related external and internal expenses.
The changes will become effective for fiscal years beginning after December 15, 2017, but nonprofits may apply the new standards earlier. We recommend that organizations begin now to develop a sound methodology for implementing these changes and adding more transparency to their financial reporting.
Call or email Patricia Yeager, WBL’s Nonprofit Practice leader and assurance partner, today to discuss financial accounting standards for your independent school or nonprofit organization.