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Thursday, December 26, 2013

Nonprofits: Preparing for FASB Financial Reporting Changes


A recent FASAC survey ranked streamlining financial statements as the most important task on the Financial Standards Accounting Board’s (FASB) agenda over the next three-to-five years. Why? Because respondents are hoping the changes will help simplify the reporting process and provide “decision-useful” information—especially for donors, creditors and other stakeholders—which is welcome news for many nonprofits.

FASB’s Not-for-Profit Financial Reporting: Financial Statements project will directly impact how nonprofit entities prepare their financial statements. Earlier this month, FASB reached several decisions that focused on net asset classifications and the information provided in the footnotes to financial statements regarding liquidity, financial performance and cash flow.

The key decisions reached at their last meeting (September 4, 2013) included proposals to simplify the way net assets are classified:

1. Replace existing requirements to present totals for each of three classes of net assets (unrestricted assets, temporarily restricted assets and permanently restricted assets) on the face of a Statement of Financial Position—and for changes in each of those classes on the face of a Statement of Activities—with similar requirements for each of two classes of net assets that convey net assets with donor-imposed restrictions and those without donor-imposed restrictions. FASB will also make conforming changes to the terminology and definitions of the net asset classes in light of this proposition.

2. Retain the current requirements that ask nonprofits to provide information about the nature of and amounts of the different types of donor-imposed restrictions, but modify the requirement in order to:
    a. Remove the hardline distinction between temporary and permanent restrictions. 
    b. Focus on describing differences in the nature of restrictions with a focus on both how and when the net assets can be used.

3. Require that nonprofits disclose information about the amount of and purposes of board designations of net assets without donor-imposed restrictions.

The final changes to nonprofit financial reporting will be included in FASB’s Exposure Draft, which is expected to be released in the first part of 2014. The Exposure Draft will be open for a specific comment period, after which the final standard will be released.

How to Prepare for the Proposed Changes
Meeting compliance requirements is crucial to receiving funding and support from donors and others, which is why you need to prepare for these reporting changes before they become mandatory. In early 2014, we suggest that nonprofit finance teams plan ahead and do the following:

  • Become familiar with the provisions. Download a copy of FASB’s Exposure Draft and Final Standard, because once released, it will change the way nonprofit financial statements and net asset information are presented on your Statement of Financial Position and Statement of Activities.
  • Educate board members and other financial statement users. Once the changes are passed in their final form, finance teams should ensure that users are informed regarding the impact of the changes on their organization’s financial statements. Ideally, the proposed changes will streamline the net asset reporting process and make statements easier for users—including donors, foundations and other funding sources—to understand.
  • Ask for help, if needed. Operating on a tight budget with minimal resources is often a given for most nonprofits. Your accountant or trusted financial advisor should be staying up-to-date and knowledgeable about reporting changes. Ask for help so that you can keep your organization focused on its mission-critical objectives.

We expect these proposed changes will generally be favorably received once the Exposure Draft is released in early 2014, because the changes are meant to streamline the reporting process and improve the usefulness of nonprofit financial statements. Once FASB finalizes the new standard, we’ll be sure to keep you informed on how the changes will impact your organization.  


1 http://www.journalofaccountancy.com/News/20138734.htm


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