Proposed Changes to Nonprofit Financial Reporting

| Business Miscellaneous

By Chris Mennel    

UPDATE 11/10/16: The final version of the nonprofit financial reporting standard was issued in August 2016. Click here for a summary of the final standard and the implementation dates.

A new proposed accounting standard could dramatically impact the current financial reporting methods for the more than 1.5 million nonprofits in the United States.  Financial reporting in nonprofits was largely affected in 1993 by the issuance of Financial Accounting Standard No. 116 and Standard No. 117 – two standards that accountants and bookkeepers have come to know very well.

These standards created the three classes of net assets that are used today (unrestricted, temporarily restricted and permanently restricted) as well as many other financial statement components that small to large nonprofit organizations deal with on a regular basis.

Although these changes have been in place for over 20 years, many non-accountant board members and others continue to struggle with the concepts behind nonprofit financial statements.  In an effort to improve the usability of these documents, the newly proposed accounting standard would:

  • Create two classes of net assets (unrestricted and restricted) instead of the current three;
  • Require the Statement of Cash Flows to be prepared under the direct method of cash flows instead of the indirect method;
  • Require all nonprofits to report expenses by nature and function.  Currently, only voluntary health and welfare organizations are required to present a statement of functional expenses;
  • Require certain reclassifications within the Statement of Activities in order to present new operating measures; and
  • Provide additional changes to the current presentation of financial statements.

While it’s easy to look at these proposed changes and groan loudly at the thought of having to learn a new reporting format, it is important to remember that many accountants weren’t thrilled with the complexity of the original 1993 standards either.

Although there will be new concepts to learn and incorporate, nonprofit board members should be pleased that the Financial Accounting Standards Board is working to improve the usability of nonprofit statements.

Similar to the for-profit world, new standards are often created based on the needs of large organizations.  However, in this case, there will be benefits for all organizations, large and small.

This post was written by:

Christopher Mennel, CPA
Senior Audit Manager

Chris oversees audit and accounting services, not-for-profit and consulting services. Chris’ specialties include manufacturing, distribution/wholesale, retail, health and welfare, service and civic organizations. Chris also prepares financial statement projections and other financial analyses.
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