In my last article about the new not-for-profit accounting principles, I discussed how ASU 2016-14 will change the way that not-for-profits organize and present information in their financial statements.
I also covered how not-for-profits can structure their net asset/equity accounts to facilitate the new requirements, which will apply to organizations whose annual financial statements are audited, reviewed, or compiled by a certified public accountant (CPA).
Here, we stay with the new not-for-profit accounting principles but focus on the statement of activity (aka income statement, profit & loss statement) and the statement of functional expenses. Not-for-profits can use cost centers (aka departments, classes, etc.) to facilitate these new requirements and this is discussed below.
Who are the new not-for-profit accounting principles for?
The new requirements apply to all not-for-profit organizations with CPAs involved in their financial statements.
Many small not-for-profits use Xero or Quickbooks to prepare financial statements. These systems, although easy to use, are not designed to naturally conform to not-for-profit accounting principles and requirements in the way that traditional fund accounting packages, like Fund EZ, MIP or Financial Edge, are. They require modification in order to produce FASB-compliant not-for-profit financial statements.
Under the new requirements, the statement of activity will present two net asset classifications: Without Donor Restrictions and With Donor Restrictions. This replaces the current requirement for three classifications: Unrestricted, Temporarily Restricted, and Permanently Restricted.
How to meet the new not-for-profit accounting requirements in Quickbooks
If you already have a well-thought-out class structure in Quickbooks, then your system may require little or no modification to meet the new requirements.
The following is a common class/subclass structure currently used by not-for-profits on Quickbooks:
a. Program A
b. Program B
c. Program C
2. Supporting Services
a. General & Administrative
B. Temporarily Restricted
C. Permanently Restricted
This type of class structure allows you to track the activities within each net asset class and allocate your expenses across the functional categories required by US GAAP. It will continue to work well under the new standard.
Alternatively, an organization could elect to use Temporarily Restricted and Permanently Restricted subclasses within one ‘parent’ class entitled With Donor Restrictions, although this is not absolutely necessary.
For internal accounting/management purposes, I recommend tracking permanently restricted endowment activities in a class separate from expendable restricted grants. They’re two totally different things, even though they will be collapsed into one column in the annual audited financial statements.
Meeting the new not-for-profit accounting requirements with Xero
Overall, I prefer Xero to Quickbooks but this is one of the areas where Quickbooks has the advantage.
For organizations that use a Xero accounting system, Xero’s class structure (known as ‘tracking’) is flat, meaning that you cannot set up subclasses within classes.
In Xero, each of the third-level subclasses listed above would be a unique class. Xero has some helpful online guidance to assist its subscribers who are used to working with subclasses.
For organizations without endowments, no modification from the above class structure would be necessary.
However, if you wanted to be hip and cool and show that you are up on the latest standards, you could simply change the names of the unrestricted class to Without Donor Restrictions and rename the temporarily restricted class to With Donor Restrictions.
To meet the new not-for-profit accounting requirements, organizations with endowments will also need two net assets released accounts instead of one. The AICPA’s new sample statement of activity provides a good illustration of how these will work.
For purposes of analysis, understanding and quality assurance, not-for-profits should also maintain supporting schedules/spreadsheets that detail the activities and balances of the organization’s various time-restricted, purpose-restricted, and endowment funds.
This should work in much the same way as when you use balance sheet schedules to analyze the activities and balances of prepaid expenses or accrued vacation.
I hope that the above clarifies how organizations using either Quickbooks or Xero can meet the new not-for-profit accounting principles.