With the implementation of ASU 2016-14, there has been a renewed focus on nonprofit financial statements.
While the pronouncement leaves the majority of your annual audited (or reviewed) financial statements substantially unchanged, it does set forth changes to functional expenses, the presentation of investment income, the statement of cash flows and liquidity disclosures. It also provides an excellent opportunity to evaluate your overall nonprofit financial statement presentation with fresh eyes.
FASB imposes very specific minimum requirements for what must be included in your financials but also provides a great deal of flexibility to enhance and tailor the presentation. This can make it more meaningful for both you and your stakeholders.
Enhance nonprofit financial statements with these four changes…
1. Create enhanced liquidity disclosures
With the enactment of ASU 2016-14, all nonprofits are now required to include a discussion of the liquidity and availability of financial assets, as well as how liquidity is managed.
This is a game-changer for nonprofit financial statements, which have traditionally taken a somewhat “cookie cutter” approach to presentations and disclosures.
The liquidity disclosure footnote gives management an opportunity to apply insight into, and analysis of, the organization’s financial position.
This insight and analysis actually becomes part of the audited financial statements. This allows organizations with a robust financial position to inform the public how solid you are.
If, on the other hand, your balance sheet doesn’t look so great, it allows you to explain what you’re doing to remedy the situation.
2. Prepare a statement of cash flows using the direct method
Nonprofits are required to present a statement of cash flows as part of their audited financial statements.
There are two main methods of doing this.
- The direct method: a very straightforward way that shows line items such as “cash paid to employees” and “cash received from donors”.
- The indirect method: a much less intuitive way for people who are not used to looking at financial statements. It starts with your change in net assets for the year (from the statement of activities); then it lists a series of differences between your net income and the actual sources; and then uses cash in order to arrive at the overall increase or decrease in cash. These differences tend to be due to various accruals and deferrals reflected in nonprofit financial statements.
Even though the indirect method produces more complex statements, it tends to be the preferred method for nonprofit organization accountants and auditors, mainly because it is faster and easier to prepare. Even if you currently use the indirect method, however, you’re free to switch to the more intuitive direct method, and your donors and board members may thank you for the added clarity.
3. Prepare a statement of functional activities
Another key change brought about by ASU 2016-14 is that ALL nonprofit organizations must now present information about their expenses by function (i.e. program services, management and general, fundraising, etc.) AND natural category (rent, supplies, consultants, etc.).
The most popular way to do this is with a statement of functional expenses using a matrix format to present functions as columns and natural categories as line items. This satisfies the minimum requirements of GAAP.
However, some organizations choose to go a step further and present a statement of functional activities, which also breaks down your revenue by department.
This can be very useful because it shows which revenue streams are supporting the various activities of the organization, as well as which activities are “profitable” versus those that are subsidized.
4. Break the statement of activities into sections
GAAP requires that you present certain minimum components on your statement of activities (SOA).
The SOA should present “revenues, expenses, gains and losses into reasonably homogenous groups and classify and report them as increases or decreases in net assets with donor restrictions or net assets without donor restrictions” (per ASC 958-205-45-2).
The SOA also needs to show your total change in net assets, the change in net assets without donor restrictions, and the change in net assets with donor restrictions.
Beyond that, you’re free to add elements.
One enhancement you can make is to divide the statement into operating and non-operating activities.
The goal with this approach is to isolate the items that can fluctuate dramatically from year to year irrespective of actions by the organization.
The operating section can include the funding generated from your normal day-to-day activities, while the non-operating component can include investment income (which can easily distort your financial statements in any given year, depending on what’s going on with the market), unusual bequests, etc.
Considering changes to your nonprofit financial statements?
Before making any significant changes to nonprofit financial statements, it’s important to firstly reference the FASB Accounting Standards Codification for more detailed guidance.
Then it’s best to brainstorm on your specific circumstances with the organization’s management, the board, development staff, accountants and auditors.
If you need assistance with any of this, we’d be happy to discuss your options. Contact us here.
