Guest Blogger, Kathi Silicato with Gunnip & Company: FASB Changes

Kathi Silicato photo

If you serve as the chief financial officer for your nonprofit, or if you’re a board member who reviews financial statements at monthly meetings, or even if you’re a particularly engaged donor, chances are you’re very familiar with at least some of the Generally Accepted Accounting Principles (GAAP) that are used to create nonprofit financial statements.

But now, some of those GAAP rules and standards for nonprofits are changing.

The Financial Accounting Standards Board (FASB) released more than 200 pages of amendments to nonprofit GAAP standards last year in a document titled “Accounting Standards Update (ASU) 2016-14.” These amendments to the existing standards are designed to simplify reporting in some areas while improving the overall usefulness of information provided to donors, grantors, creditors, and others.

Within the next year and as soon as Jan. 1, 2018 (depending on when your fiscal year begins), these changes will affect how nonprofits follow GAAP standards. Several of these changes will affect nonprofits of almost any size:

  • The three standard categories of net assets – unrestricted, temporarily restricted and permanently restricted – will be collapsed into two categories, “with donor restrictions” and “without donor restrictions.” By reducing the number of classes, the FASB hopes to “reduce complexity, increase understandability, and enable greater use of multi-period comparative financial statements” for everyone who reviews these statements.
  • Elsewhere, nonprofits following GAAP will disclose how much those restricted funds affect the financial resources at their disposal – revealing how financially liquid the organization is, and how much flexibility it has to use existing assets.
  • All nonprofits following GAAP will be required to report expenses both by functional and natural classifications. “Functional classifications” group expenses by their purpose (by program services as well as supporting services like management, fundraising and member development), while “natural classifications” group them by type (such as salaries, electricity, repairs, rent and employee benefits).

For some smaller nonprofits, a notation on a statement of disclosure might be enough to meet the standards, but larger organizations may have to take a hard look at their chart of accounts to make sure they’re capturing enough detail for what this type of reporting requires.

This is why it’s essential to plan ahead now. These changes to GAAP are effective for annual financial statements issued for fiscal years beginning after December 15, 2017 – which means that nonprofits that operate on a calendar fiscal year will want to start entering data in accordance with the new GAAP standards at the very start of the new year.

If you’re responsible for finances at your nonprofit, I encourage you to take three steps to get ready. First, ask your accountant about the changes to come and how they will affect your organization. (Many firms, like ours, will be holding seminars and information sessions for their clients in coming weeks.) Alert your board that these changes are happening, and be aware that some organizations that need to make major changes may need to budget for the necessary time and resources to do so. And finally, make any necessary changes as soon as possible. Entering data in accordance with these new GAAP rules from the start is the best way to save your organizations from headaches at the end of your next fiscal year.