John Maxwell famously said, “Change is Inevitable. Growth is optional.”
Recently, there’s no doubt that nonprofit organizations have seen their fair share of change. New accounting standards have brought forth significant changes in financial reporting for nonprofit organizations—three of which have had monumental influence on the ways that nonprofits are reporting their operating results.
While these recent accounting changes have been immense in their impact, they can also serve as an opportunity for nonprofits to grow and become even stronger. Yet, it can often be hard to know what to do and even where to begin in order to fully achieve the kind of growth that Maxwell mentions in response to significant change—especially when it comes to accounting.
Below are the three most recent and significant changes to the nonprofit financial reporting landscape and what they mean for nonprofit organizations.
Nonprofit Financial Reporting Change #1 – ASU 2016-14
Financial Accounting Standards Board (FASB) Accounting Standard Update (ASU) 2016-14, which deals with the presentation of nonprofit entity financial statements, was one of the biggest changes to impact nonprofit reporting in the last 25 years.
According to the Journal of Accountancy, “The changes are designed to improve the presentation of information communicated in not-for-profit financial statements, in particular net assets, liquidity, financial performance, and cash flows. ASU 2016-14 emphasizes liquidity and statement of financial position improvements.”
This standard has many far-reaching implications for nonprofits, and it touches many areas, including how restricted and non-restricted contributions are recorded, how they disclose information about their liquid resources, how they use endowments and much more.
Nonprofit Financial Reporting Change #2 – ASU 2014-09
Many nonprofits are currently in the midst of implementing ASU 2014-09, Revenue from Contracts with Customers (Topic 606).
As a whole, this standard outlines and standardizes how organizations record revenue. For nonprofit organizations specifically, Topic 606 applies only to exchange transactions—not to contributions.
Distinguishing between an exchange (reciprocal) transaction and a contribution (non-reciprocal) can be tricky, and to help clarify the difference, the FASB has issued ASU 2018-08, Not-for-Profit Entities (Topic 958): Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made:
- “Exchange: Reciprocal transfers in which each party receives and sacrifices approximately commensurate value.
- Conditional contribution: A contribution with a donor/contributor/grantor stipulation that represents a barrier that must be overcome before the recipient is entitled to the assets transferred or promised. Failure to overcome the barrier gives the donor/contributor a right of return of the assets it has transferred or gives the promisor a right of release from its obligation to transfer its assets.
- Unconditional contribution: A transfer of cash or other assets, as well as promises to give, with no donor-imposed conditions, to an entity, or a reduction, settlement, or cancellation of its liabilities in a voluntary nonreciprocal transfer by another entity acting other than as an owner.”
This guidance will likely result in more contracts being accounted for as either conditional or unconditional contributions vs. exchange transactions.
Nonprofit Financial Reporting Change #3 – ASU 2016-02 – Leases (Topic 842)
ASU 2016-02 – Leases (Topic 842) represents a significant overhaul of the accounting treatment for leases. Most leases will now be brought onto an organization’s statement of financial position as right to use assets and lease liabilities.
According to the AICPA, “The ASU simplifies transition requirements and, for lessors, provides a practical expedient for the separation of non-lease components from lease components.”
As a result of this standard, the right to use asset will be amortized over the life of the lease (similar to depreciation on capital assets), and the lease liability will be reduced over time as payments are made. Previously, leases that were determined to be operating leases were only disclosed in the footnotes.
This standard was originally effective for nonprofit organizations for years beginning after December 15, 2019 (calendar 2020 year ends). However, the FASB recently approved the delay of the implementation of this standard to fiscal years beginning after December 15, 2020 (calendar 2021 year ends).
Responding to Nonprofit Accounting Changes
While new accounting guidance may seem daunting, complying with new regulations and adapting to new guidance is certainly worth the effort.
Warren Averett’s professionals are here to help you navigate these changes. We have been serving the nonprofit industry for over 60 years and are focused on guiding you through these financial and accounting changes, so that you can focus more of your time and energy on advancing your mission.