Remodeling Your Financials – the open floor plan
Joan M. Renner, CPA, CGMA, Director 501(c)(fit!)
When I’m home, I love watching those home remodeling TV shows. With all TVs on the right channel, I can go about my activities, following house after house through its transformation from an outdated property into the latest style. Sometimes they knock down a wall, sometimes they add a fire pit or even pop out an addition. It can be messy for a while and even frustrating, but with the right effort and resources, the remodelers arrive at the homeowners’ perfect property.
Soon you’ll be involved in your own remodeling project–not on your home, but on your nonprofit’s financial statements. Nonprofit accounting standards are changing, and so will your financial statements. Today, let’s discuss one aspect of those changes, the effect on restricted net assets. These are assets earmarked by the donor either for a specific purpose or time period, or as a permanent endowment. This remodel will be like knocking down a wall.
Under current accounting standards, you’ve been presenting your temporarily restricted net assets separately from any permanently restricted net assets as if they’re separated by a big wall, reflecting former laws related to fund management that emphasized an endowment’s original donated value. Now, fund management laws have changed, eliminating the concept of original value. Organizations can now spend endowment funds below the original value if believe it’s prudent to do so and follow prudent management standards. In effect, the new laws have made the wall between temporarily and permanently restricted net assets outdated. The current wall is more like a movable partition.
To reflect this legal flexibility, the new accounting standards for nonprofit financial statements give restricted funds an open floor plan, knocking down the wall between temporarily and permanently restricted net assets to create one class called net assets with donor restrictions. The details of those restrictions will be described more fully in your footnotes. The result is a clearer representation for financial statement users.
In addition, there’s another change in the new accounting standard for endowments whose fair values are below the original stated amount. As a bonus to removing the focus on original donated value, endowment gifts no longer have the potential to break the bank if the market value of the investments dip below the original value. Currently, investment value that dipped below original value had to be made up from unrestricted net assets–a potentially crippling consequence that donors never intended. Under the new standards, the restricted net assets value just goes down without subtracting from your general funds and it’s all disclosed in the footnotes.
What can we learn?
The new accounting standard for nonprofit financial statements is Accounting Standards Update (ASU) 2016-14, Presentation of Financial Statements for Not-for-Profit Entities. Its accounting and disclosure changes include:
Restricted funds, board-designated funds, endowments, functional expense reporting, statement of cash flows, investment income and expenses, cash management policies and liquidity.
Ask your accountant to help you develop a plan to implement the new accounting standard.
If you’re the accountant charged with implementing the new standard, join us for a detailed look at our live on-day seminar on November 3, 2017 in Alexandria, VA, Financial Intensive Training on the New Financial Reporting GAAP—Remodel Your Financials – an in-depth look.
If you’re new to nonprofit finances, this is a great time for nonprofit managers and emerging leaders to become familiar with the new nonprofit financial statements right from the beginning. We’re including the basics in the Remodeling Your Financials session of our live 2-day seminar, Financial Leadership Training for Emerging Nonprofit Professionals.
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