What you need to know about the new FASB rulesNew rules for nonprofit financial reports are on the horizon — the first major changes made by the Financial Accounting Standards Board (FASB) for nonprofits since 1993. Here's a primer on the new rules and how they might affect your nonprofit.
What's the scope of the new rules?
The full update is 270 pages, but the benefits are simple — improved communication about your nonprofit's financial performance to board members, creditors, donors, grantmakers and other stakeholders. The new rules also reduce the complexities and costs of preparing financial statements, making it easier to be transparent about your nonprofit's finances.
What are the key changes?
The new rules affect:
- Net asset classification. The current standard has three classifications for net assets — unrestricted, temporarily restricted and permanently restricted — which has long proved confusing. The new standard has two classifications: net assets with donor restrictions and those without. Footnote disclosures that detail the timing, nature, amounts and types of restrictions will be required.
- Liquidity management. One of the key concerns the FASB consistently heard while working on the updates was the difficulty stakeholders had in understanding a nonprofit's liquidity, be it cash on hand or other readily available assets. The new standards require nonprofits to disclose how they manage liquidity, including information that clearly identifies the availability of cash for general expenditures.
- Classification of expenses. The new standards require nonprofits to provide an analysis of expenses by functional and natural classifications. Functional expense classifications include categories such as programming, management and fundraising. Natural expense classifications include categories such as salaries, employee benefits, rent and utilities. Nonprofits must also disclose the methods used to allocate expenses to specific functional categories.
- Underwater endowments. Endowments with a current value that's less than the original gift amount are currently classified as unrestricted net assets. Given the new standards, they'll now be classified as net assets with donor restrictions. Disclosures will be required to include the original amount of the endowment, the nonprofit's policy regarding spending from these funds and whether that policy was followed.
Who must follow the new rules?
The new rules affect almost all nonprofits that issue financial reports using generally accepted accounting principles. This includes charities, foundations, private colleges and universities, health care providers, cultural institutions, religious organizations, trade associations and others.
Do the new rules change how transactions are handled?
By and large, implementing the new rules won't affect how your nonprofit handles transactions. However, key members of your staff and board members will need training on the new rules. Seek guidance on implementation specifics for your organization from your accountant or financial manager.
When do the new rules take effect?
The new rules are effective for annual financial statements issued for fiscal years beginning after December 15, 2017, and for interim periods within fiscal years beginning after December 15, 2018. Early adoption is permitted and encouraged. Meanwhile, phase 2 changes are on the horizon. These will focus on additional issues, including operating measures, but the time frame has yet to be determined.
National Council of Nonprofits: FASB's new financial reporting rules for nonprofit organizations | What you need to know by Ed Mulherin (2016)
Nonprofit Quarterly: What the new FASB accounting standards will mean for your nonprofit by Ruth McCambridge (2016)
American Institute of CPAs: FASB's new standard aims to improve not-for-profit financial reporting (2016)
Financial Accounting Standards Board: Not-for-profit entities (topic 958): Presentation of financial statements of not-for-profit entities (2016)
Financial Accounting Standards Board: FASB issues new guidance on not-for-profit financial reporting (2016)