Help Your Board Understand the New Nonprofit Accounting Standards

a businessman presenting to a room of colleagues in a meeting November 21, 2016 By: Christine Umbrell

New guidelines aimed at simplifying nonprofit financial statements might require some decoding for association boards. Here's what you need to know.

In August, the Financial Accounting Standards Board set forth new guidelines intended to improve and simplify how nonprofits present their financial statements, under what's known as the Accounting Standards Update (ASU). Though associations have until 2018 to implement the new standards, association staff should start working now to determine how the changes will affect their financial statements, and how to communicate the changes to their boards.

"Boards rely on the associations' financial statements and absolutely need to be a part of the process for managing implementation," says Lee Klumpp, CPA, national assurance director in BDO's nonprofit and higher education practice.

"Currently, most trade associations inform boards of their financial position and results via internal financial statements, but it really depends on how the committees and boards operate,"Klumpp says. Annual financial statements are critical association documents because they support the budgetary information association staff share with board members all year long. "External audited financial statements tell the board at the end of the year whether the information the staff has been presenting is complete and accurate," he says.

Consider these suggestions for introducing the new ASU requirements to your association's board members:

Read and digest the standard. First, make sure the financial experts on your staff, such as the CFO, controller, or financial executives, read the entire standard and understand its impact, Klumpp says.

Boards rely on the associations' financial statements and absolutely need to be a part of the process for managing implementation.—Lee Klumpp, CPA, BDO

Communicate the changes to your board members. "Educate the board on the changes, and how the changes will affect your financial statements," Klumpp says, adding that you may need to "sell" board members on why the changes are necessary. He also suggests that the CFO, controller, or financial executive take the lead in conveying the information—with assistance from the association's auditors.

Provide a mock-up of the changes. Another recommendation would be to take last year's statements and mark them up to match the requirements in the new standards, Klumpp says. Then, describe to your board members which parts of the ASU might have the biggest impact on your financial statements—for example, the following changes:

  • The three-class net asset structure will be replaced with a simpler, two-class structure. Previously, the differences between the three classes were hard to distinguish—going forward, the two classes will be classified as "net assets with donor restrictions" and "net assets without donor restrictions," Klumpp says. This change is intended to eliminate confusion concerning the categorization of net assets.

  • Associations will be required to report expenses by both function and natural classification. This can be done on a separate statement, on the face of the statement of activities, or in the footnotes. "Previously, associations were not required to present the statement of functional expenses and its detail," Klumpp says. "Since associations haven't had to do it in the past, and they don't have to report it on the Form 990, it will require some extra work for them to set up a process to pull the information together."

  • Associations will be permitted to present operating cash flows using either the direct or indirect method and will no longer be required to present the reconciliation of change in net assets to cash provided if they use the direct method. Previously, "if you used the direct method, you also needed to provide the reconciliation," Klumpp says. Be advised that "using the direct method will require a small initial investment of time in setting up the process."

  • Nonprofits will be required to be more transparent in making disclosures regarding the management of liquidity and the financial assets available to meet near-term demands for cash. Some associations may have to adjust their reporting process to accommodate this change.

  • Associations may need to adjust how they disclose reserve funds. Some boards "put aside moneys through reserves—often funds for future projects, expansion of member programs, and to establish reserves," Klumpp says. "These designations are now required to be disclosed." Ultimately, this change could promote transparency with members: "You will be able to see in financial statements where organizations plan to use resources that are set aside for the future."

Following these steps will make the transition to the ASU easier for both association staff and the board of directors. Throughout your communications, "realize you're talking to people who are not primarily financial experts, but who are business people," so don't get too technical in your discussions, Klumpp says. And remember to present the changes in a positive light. "Most people actually think the changes are good," he says.

Christine Umbrell

Christine Umbrell is a freelance writer based in Herndon, Virginia.