Among the many nuances separating nonprofits from their for-profit counterparts, perhaps none are more obvious or differentiating than the criteria by which nonprofits account for their money. It’s called fund accounting and, for nonprofits, it’s about transparency and compliance.
Most accounting professionals monitor revenue and expenses to maximize their organization’s profits, but as a nonprofit organization receiving revenue through public and/or private sources of funding, your accounting department must use and understand the system of fund accounting and why it’s important to your organization.
The Importance of Fund Accounting
Fund accounting is the system of accounting used by nonprofit entities to track how monies are collected, allocated and used. For nonprofits, the focus of fund accounting is on accountability to build trust and foster donations, rather than pursuing profitability.
By using fund accounting methods, your nonprofit organization is able to generate financial statements to show how funding is being spent, prove revenue is allocated for specific purposes and to provide transparency. Executed properly, this type of nonprofit accounting can help identify key strengths and weaknesses in your organization.
FASB’s Accounting Standards Update (ASU) 2016-14
In August 2016, the Financial Accounting Standard Board issued Accounting Standards Update (ASU) 2016-14, Presentation of Financial Statements of Not-for-Profit Entities, for the stated purpose of improving financial reporting by nonprofit entities and contains changes in reporting requirements that significantly affect how your nonprofit organization communicates with its stakeholders.
New Net Asset Classifications
The new standard replaces the existing three net asset classes (unrestricted, temporarily restricted, and permanently restricted) with two new categories: net assets with donor restrictions and net assets without donor restrictions. The FASB update goes even further to remove the distinction between temporary and permanent restrictions.
Net assets with donor restrictions include what is currently reported as temporarily restricted and permanently restricted. This would include funds restricted by the donor in perpetuity, restricted for specific purposes, restricted by the passage of time and for amounts of underwater endowments. This is revenue that is received, that is designated for a specific purpose and can only be used for that purpose.
Net assets without donor restrictions consist of that which was previously known as unrestricted net assets is now called “net assets without donor restrictions.” Board-designated net assets also fall under this classification and can be used at the discretion of your organization’s management with donor designations.
Financial Reporting Simplified with Accounting Software for Nonprofits
These updates were enacted to allow your nonprofit to more accurately illustrate its financial picture. Specifically, the new procedures outline how your organization needs to present its net assets, expenses, available resources, and operating cash flows. The issuance of these updates outlines FASB’s broadest changes to its nonprofit financial reporting standards in two decades.
With so many financial reporting changes affecting your nonprofit organization, you will need modern accounting software in order to adhere to the new standards. In response to FASB’s Accounting Standards Update (ASU) 2016-14 reporting for nonprofits, Sage Intacct comes equipped with the updated required reporting formats to meet your nonprofit organization’s financial reporting and transparency requirements.
In order for you to make a smooth transition to full compliance, Sage Intacct has simplified the process of generating your financial statements to allow you to tell a more accurate financial story. Providing this relevant and useful information about your organization’s resources will prove helpful to donors, grantors, creditors, and others in assessing your nonprofit organization.
Sage Intacct frees your accounting team from the burden of managing updates like (ASU) 2016-14 and others. Developed with fund accounting and the unique reporting requirements needed by nonprofit organizations as a priority, Sage Intacct is the preferred nonprofit accounting software for its scalability, reporting and integration capabilities.
With the new FASB ASU 2016-14 reporting requirements, critical information can be delivered to each stakeholder so your complete nonprofit financial reporting to maintain compliance and transparency.
Contact us at e2b to learn more about Sage Intacct. There’s a Reason Sage Intacct is the AICPA’s Preferred Provider of Financial Applications.