GRAND RAPIDS — The majority of people who serve on the boards of nonprofits lack the time to educate themselves about the terminology used in their organization’s financial statements.
Many of them find it confusing and are not afraid to admit it, said Peggy Bishop, a CPA and a partner with Beene Garter LLP, who leads the firm’s nonprofit area.
In fact, it was that confusion that prompted a request from the Financial Accounting Standards Board asking nonprofits to simplify their financial reporting procedures, Bishop said.
“One of the main provisions of this new standard is changing the classification of net assets,” Bishop said. “When you’re talking about net assets, it will be taken from three to two categories, which will simplify the financial statement for those who read it.”
Currently, a number of nonprofits use three net asset categories: unrestricted, temporarily restricted, and permanently restricted.
“Board members don’t know what these categories really mean, so the new FASB standards will reduce it to restricted and unrestricted,” Bishop said. “They see some assets and they see some cash, but those who are reading this information want to know if it’s readily available to do what the board and management see as a good idea.”
For instance, an organization may receive $5 million from a donor with no restrictions on how it must be spent, but that donor could either be giving the money all at once or spreading that $5 million payment over a five-year period with $1 million given annually.
“People need to have a better understanding of the assets that are available and how liquid they really are at any given time,” Bishop said.
In addition to a streamlined and consistent reporting process for net asset classifications, the new accounting standards also call for qualitative and quantitative requirements in the reporting of investment returns, expenses, the liquidity and availability of resources, and the presentation of operating cash flows.
“This will improve the presentation and disclosures to help not-for-profits provide more relevant information about their resources and the changes in those resources to donors, grantors, creditors, and other users,” FASB Chairman Russell Golden said in a statement announcing the shift.
Theresa Cook, finance manager for the First Presbyterian Church in Three Rivers, said the FASB research identified reporting weaknesses that she has experienced as a finance director who has worked for more than 25 years with many nonprofits.
“Limited resources in technology, staff expertise, funding, pay and benefits and decreases to funding for nonprofits all add to the limitations a nonprofit faces when trying to fulfill their mission with these new financial reporting challenges,” Cook said.
She said most nonprofits don’t have a CPA working for them, which means they will have to consult or contract with a CPA. There is a lot of money involved in restructuring those accounts and training staff in the new accounting procedures, Cook added.
“Spending any additional monies when operational costs need to be minimal in order to support its mission is not a priority in the nonprofit world — serving the dire needs of the community is,” Cook said. “However, the more a nonprofit can understand the ebb and flow of donations along with grant reimbursements compared to its present and future expenses, the better prepared it will be in addressing its present and future needs.”
The amended standards are scheduled to take effect for fiscal years beginning after Dec. 15, 2017 and for interim periods within fiscal years beginning after Dec. 15, 2018.
Nonprofit organizations that will be affected include charities, foundations, colleges and universities, health care providers, religious organizations, trade associations and cultural institutions.
Prior to this update, the most recent changes to the financial reporting standards occurred in the mid-1990s. Bishop said she remembers how sweeping those changes were for the nonprofit sector and the challenges involved in implementing them.
“It involved educating them on how to read newly-revised financial statements,” she said. “This next set of new standards won’t involve the same learning curve and will hopefully simplify and clarify current procedures.”
While some nonprofits are already doing what the new reporting standards call for, many are not.
Additionally, a requirement to report the “functionality” of the organization, or its allocation of expenses across each program offered and the supporting services involved, could lengthen the reporting process for many groups, sources said.
Previously, not all nonprofits were required to show functionality, such as the total amount paid for salaries or rent. Bishop said this can be a challenge because an executive director may be paid for the primary job of managing and directing an organization, but that person also may be cultivating donors or helping to develop a program.
“They need to do a thoughtful analysis to figure out how much is being allocated to do these tasks,” Bishop said. “As a donor, I may want to know that if I’m giving $1, it will go to programming. But you can’t have an effective program without effective infrastructure. You also have to be able to pay the phone bill or perform an audit.”