Nonprofit organizations need simplified accounting processes for the increasingly complex financial reporting requirements their organizations are expected to meet. Unfortunately, a “doing more with less” resilience has left many organizations with outdated financial management solutions which begin costing significant time and money as the organization outgrows their off-the-shelf accounting systems.
Let’s take a look at some of the complexities of nonprofit expense reporting to illustrate the need for modern cloud accounting with Sage Intacct.
(ASU) 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
The Financial Accounting Standards Board (FASB) set a new series of accounting standards for nonprofit entities at the end of 2017. As with any change in regulatory standards, shifting to these new practices have created some challenges for NFPs as they achieve compliance.
Adherence to accounting standards is most vital when a nonprofit comes under audit, it is important to adhere to these standards irrespective of audits. Accounting standards maintain uniformity in how financial information is collected and presented, and thus are central to any disclosure of financial information beyond the scope of an audit. Meticulously compiled and presented financials serve to demonstrate and bolster the mission and organizational focus of any NFP, making them a valuable tool in donor solicitations.
Understanding Net Assets – Restricted Versus Unrestricted
The definition of restricted assets has shifted a bit for NFPs. Donors are still able to place restrictions on how their contributions can be used, and these restrictions create significant complications in the accounting process. Donor contributions are now labeled as either “with donor restriction” or “without donor restriction.” A donor could choose to set the restriction that their gift to the organization may only be used for certain specific programs, which must be designated and tracked within the organization’s accounting system. Assets labeled “with donor restriction” or “without donor restriction” should be broken out into separate columns on financial statements or by featuring these designations as line items on the Statement of Activities.
NFPs are required to maintain any documentation and correspondence regarding the restrictions on donor gifts. Maintain clear evidence of how your organization solicited donations and any conditions placed upon those donations. Solicitation language must be precise about whether you’re soliciting for general purposes or more specific program purposes, as more specific language could shift the classification of asset restriction from being something the donor specifies to something they reasonably assumed based upon how you positioned the contribution request.
Liquidity and Available Resources
Nonprofits must now report qualitative data regarding the way they manage and utilize their liquid assets. This report must be submitted within one year of the date for the balance sheet. Similarly, nonprofits must also offer quantitative data regarding its available financial assets within one year of the date for its balance sheet.
Standards Related to Expense and Investment Reporting
The FASB now requires that nonprofits report their expenses in regard to both their nature and their function. The goal of this change is to offer clearer insight into discretionary versus fixed expenses, how related assets are distributed, as well as any additional expenses related to linked services.
Reporting Operating Cash Flows
The FASB changed their rules on direct and indirect cash flows reporting in an effort to reduce operating costs for NFPs. Nonprofits may now choose to skip indirect reporting for cash flows if they elect to go the route of direct reporting instead.
Telling the Story with Financials
The upshot of the changes to NFP reporting standards is that organizations can use the new standards to better present their missions to potential donors and to clearly lay out the story of how they manage their assets with regard to their activities and programs. Nonprofits should use the opportunity presented by these changes to offer those parties interested in their financials a better look into how they use their resources to achieve their organizational mission.
Reporting Liquidity and Available Resources for Your Nonprofit
More and more nonprofits are making the switch to cloud accounting software for their new reporting requirements. Sage Intacct gives nonprofits a cloud-based financial management solution with functionality and accessibility that manual processes or onsite systems simply can’t provide.
Sage Intacct can help you sort through the different criteria used to classify expenses to meet your different reporting statement goals. As the preferred fund accounting solution for nonprofit organizations, Sage Intacct can help you simplify the complex processes surrounding liquidity and resource reporting.
Some contributions are intended for ongoing perpetual investment use, which typically means that the initial seed investment is restricted in nature (classified as “in perpetuity” for accounting purposes), while the earnings that come from the investment are unrestricted. While there is no longer a fully separate category for these assets, they still must be tracked and labeled in such a way that indicates the difference between them and other assets that come “with donor restriction.”
Using a gift for its intended purposes or within its designated time period results in the NFP being able to consider it “released from restriction.”