Top 3 Takeaways on FASB’s New Not-for-Profit Standard
Are you nervous about implementing the Financial Accounting Standards Board’s new not-for-profit standard? At 270 pages in length, it is understandable that one would find it daunting and would be unsure of where to begin. Even though the standard does not go into effect until 2018 for most not-for-profits, you and your clients need to be thinking about the standard and your implementation plan now.
To start my education, I reviewed this AICPA Insights blog post from FASB member Larry Smith that provides an overview of the new standard. I also recently attended the webcast, “Applying FASB’s New Not-for-Profit Financial Statement Standard,” which was hosted by the AICPA’s Not-for-Profit Section team. I learned some practical tips and received information I can share with my clients.
Here were my top three takeaways from an implementation perspective:
- The new liquidity and availability disclosures will require robust information not currently tracked by not-for-profits. Going forward, not-for-profits will disclose quantitative and qualitative information regarding liquidity and availability of resources. For organizations that rely on contributions and grants that often come with restrictions, these quantitative disclosures, in particular, can paint a stark picture of a not-for-profits’ financial position. For example, the webcast discussed an organization with $229,200 of financial assets at year-end, and the tabular disclosure showed only $859 in financial assets available to meet cash needs within one year. Additionally, there is a new requirement to disclose qualitative information on how the not-for-profit manages its liquid resources to meet cash needs for general expenditures as of and within one year, respectively, of the statement of financial position date. With that in mind, organizations need to ensure the level of detail in the notes provide appropriate context for the readers of the financial statements.
- Some not-for-profits will need to re-visit their policies and practices around internal designations of net assets. Under the new standard, not-for-profits will report the nature and amounts of board designations of net assets. In the past, those internal designations were reported as unrestricted net assets. Under the new standard, they will be reported as “net assets without donor restrictions.” Although the underlying accounting does not change, the presentation of such amounts and disclosures are changing. Some not-for-profits may need to revisit their policies and ensure they are properly tracking those amounts so they are ready when the time comes.
- The new standard changes the reporting of investment expenses. The new standard requires the netting of investment expenses against investment return. These include both internal and external investment expenses, so this will be another area requiring additional analysis by the not-for-profits’ management team. What stood out to me was the definition of internal investment expenses, which “involves the direct conduct or direct supervision of the strategic and tactical activities involved in generating investment return.” For not-for-profits and especially foundations with large investment portfolios (where a lot of the strategic function is internal), the analysis and allocation of salaries, benefits and travel will require thought and judgment on the part of the not-for-profit’s management team. Additionally, organizations may need to review the timesheets or other tracking methodology to capture time to aid in this process.
Overall, I feel better prepared to implement the new standard after participating in the AICPA Not-for-Profit Section's webcast. I am advising my clients to be proactive now and start making an implementation plan. AICPA Not-for-Profit Section members can access the webcast by visiting the webcast archive. Before you know it, 2018 will be here, and it is important to start contemplating the changes from the standard sooner rather than later.
Paul Preziotti, CPA, Principal, Johnson Lambert LLP. Paul is responsible for providing audit, consulting services, and engagement management to not-for-profit entities and employee benefit plans. He has significant experience serving as an advisor for organizations on a variety of issues including risk assessment, governance, compliance and internal control considerations.
Man reviewing document image courtesy of Shutterstock