If you sit on a nonprofit board, have a private foundation or are heavily involved in philanthropy, the upcoming nonprofit changes will be of interest to you.
Like all business entities, nonprofits will have to consider the capitalization of leases and address revenue recognition in addition, there are two big changes on the horizon.
Everyone is aware of the Tax Cuts and Jobs Act and wants to know the ultimate effect on their tax situation. Were you aware that the tax law is now requiring nonprofit entities to pay tax on qualified transportation fringe benefits, parking facilities used in connection with qualified parking and on-premises athletic facilities?
On the accounting front, the Financial Accounting Standards Board (FASB) recently issued a new accounting standard update (ASU) that will affect nonprofit organizations for financial statements beginning after December 15, 2017. These standards are expected to provide more useful financial statements for donors and grantors. Some of the immediate improvements are expected to address:
- Complexity in net asset classification
- Clarity of information regarding liquidity and availability of cash
- Transparency in reporting of financial measures
- Consistency in reporting expenses by function and nature
- Improvements in the statement of cash flows
While getting ready to consider implementation, a good place to begin is with the new liquidity and availability of cash disclosure. It will require information that may not be currently tracked. This new model will draw attention to circumstances in which a nonprofit organization does not maintain adequate liquid assets to comply with donor restrictions. More importantly, organizations that rely on restricted contributions and grants may find that the quantitative disclosures paint a stark picture of the organization’s financial position. If your organization uses restricted resources to pay for expenditures that did not meet the underlying restriction (borrowing the resources, sometimes without the ability to restore those resources promptly), the liquidity disclosure will make that situation apparent.
One question boards should address now is policies around board designated funds. If a board has strict policies on the use of board designated assets, this could result in an organization having a difficult liquidity position. Changing a board policy to indicate that board designated assets could be used if the financial need arose, with board approval, the liquidity disclosure could be much more favorable.
The organization should check the effect of the new standards on its important ratios. Foundations and other donors, banks and other lenders, and watchdog agencies often use ratios to qualify and evaluate organizations. If ratios will no longer be met, it is necessary to decide whether to ask for a change in the required ratio. Additionally, it is possible that some amounts that are used in ratios will no longer be reported in financial statements (e.g., permanently restricted net assets), and the organization may want to approach the donor or lender to see how the ratio should be computed in the future.
Contact RINA’s nonprofit team or review our website for more information on the changes effecting nonprofit organization.