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Financial Statement Changes: 5 Steps for Nonprofit Boards

Posted By Delferine Spooner, Friday, January 19, 2018
Updated: Thursday, January 25, 2018

Nonprofit accounting and finance professionals have been talking about the upcoming changes to financial statements for some time, but many others haven’t heard about the changes, including board members. Board members are responsible for oversight of the financial reporting process, and as such, they’ll want to take an active role during implementation of the new guidance This article from AICPA highlights five proactive steps you can take to help make sure your board understands the implications of the new financial reporting standard.

The Financial Accounting Standards Board's (FASB) Accounting Standards Update (ASU) No. 2016-14, Not-for-Profit Entities: Presentation of Financial Statements of Not-for-Profit Entities, was issued in August 2016. The standard applies to all not-for-profits and is effective for years beginning after December 15, 2017. Early adoption is permitted.

Here are five proactive steps to help make sure your board understands the implications of the new financial reporting standard:

1. Identify areas that will be affected: The key financial statement areas that will be impacted by the new standard are:

  • net asset classifications
  • required liquidity disclosures
  • investment return reporting
  • statement of cash flows presentation
  • functional expense reporting

It’s important for the board to understand how the changes will affect the financial statements prior to seeing the audited version. Consider having the organization’s finance staff, independent auditor or financial consultant provide the board with a high-level overview of the changes and discuss the specific impacts.

2Discuss the implementation plan: Board members are ultimately responsible for fiduciary stewardship of the organization. However, the board will often delegate certain duties, such as oversight of financial reporting, to the audit and/or finance committee. Management will want to ensure that the board or responsible committee understands the plan to implement the new not-for-profit financial reporting standard, including the timeline and resources needed.

3. Consider the cost: There could be cost implications of implementing the new standard, including additional staff time, accounting system needs and increased audit costs. The not-for-profit’s finance staff and independent auditors can provide input on the budget implications in the first year of adoption, allowing management and the board to plan accordingly.

4. Update and approve policies: Understand that organizational policies might change because of the standard. A good practice is to have at least one board meeting annually to review, discuss and approve policies. Take this time to consider adding “Policy Review and Discussion” to the agenda of one of the established board meetings for the coming year.

5. Review board designations: The financial statements will require disclosure of all board designations and similar self-imposed limits on net assets without donor restrictions. As such, this is a good time for the board to review any existing board-designated net assets. Many organizations have not reviewed or discussed these in years. New board members may not even know they exist. When reviewing interim financial statements at an upcoming board meeting, consider discussing whether the designations are still relevant. The organization may also wantto have the board reaffirm the designations at the meeting. While there is no requirement to have board-designations on net assets, if there are none, be sure to document that fact in the board minutes.

The current not-for-profit financial statement format and terminology are more than 20 years old. The new standard aims to improve financial reporting by providing more useful information to stakeholders and addressing inconsistencies in the areas of expenses and liquidity. While the changes may initially feel overwhelming, they give organizations a great opportunity to better understand their own financial health, tell their stories externally and compare themselves to other organizations.

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