Strategy Meets Standards In Nonprofit Accounting

• May 15, 2019
• Curtis Klotz

In the past couple of years, the Financial Accounting Standards Board (FASB) has issued a number of new or revised standards that directly and indirectly affect nonprofits. Standards have gone into effect recently that concern liquidity, grants and contributions, functional expenses, and revenue recognition. Any time a new standard comes out, those of us who work in or with nonprofits need to consider its implications for our financial practices.

The temptation with all things accounting is to characterize them too narrowly in terms of compliance – “Are we getting it right? Are we doing it right?” While being accurate and responsible with our accounting is important, nonprofits can make more powerful use of new accounting standards if they learn to use them strategically.

Accounting Standards and Nonprofit Liquidity Strategies

One place a standard can be elevated from compliance to strategy is the new liquidity disclosure required under Accounting Standards Update (ASU) 2016-14 Presentation of Financial Statements of Not-for-Profit Entities. The new standard draws attention to the concept of liquidity for nonprofits. Having spendable assets (i.e. cash, savings, and investments) available to use as resources for our nonprofit program work is crucial to mission and financial success. To address the standard, nonprofits will need to consider what liquidity strategies, practices, and reporting they will use to monitor their financial resources and ensure their financial health.

But as with any new standard, misunderstanding the principles or applying those principles too zealously can lead to errors. At its narrowest, the FASB definition of liquidity includes only those assets that are available for general use within the next 12 months. Assets counted as generally available are only those without donor restriction, without board designation, and without any other limitation on the purpose or timing of their use. The webinar, “Strategy Meets Standards,” explains more about which assets are considered generally available and how to include information in disclosures that goes beyond the basic definition. Without a thorough knowledge of nonprofit liquidity, a financial statement user or preparer might define liquidity rigidly and wrongly conclude that a nonprofit is having financial difficulties. In this AICPA Quick Read, I explain more about how  misunderstanding nonprofit liquidity could lead to improperly identifying a going concern issue.

Accounting Standards and Nonprofit Fundraising Strategies

Sometimes the restrictions placed on grants are of our own making.  By taking a creative look at the new standards on grants and contributions, we can use accounting principles to create new fundraising approaches. FASB ASU 2018-08, Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made, provides accounting information that can be adapted to build better nonprofit grant proposal budgets. Knowing the accounting that determines how grants are recognized and released gives us the opportunity to craft our nonprofit proposal narratives and budgets so that contributions behave flexibly. By understanding the accounting, we can avoid inadvertently placing restrictions on the money we raise. How we “shape our ask” ensures we won’t be victims of our own proposal writing.

Accounting Standards and the Nonprofit Overhead Debate

Another area covered in ASU 2016-14 is the statement of functional expenses. The new standard now requires that the statement of functional expenses – the place where program activities, management and general (administrative), and fundraising expenses are broken out – be displayed by nature. Displaying expenses by nature generally means listing them by line item. On the surface this doesn’t seem like a big change, but drawing attention to the functional expense breakout and requiring that it be shown in more detail does stir up an old debate in the nonprofit world.

Nonprofits have long suffered from a mentality that administrative and fundraising expenses should be kept low. Recent research on the functional expense ratio shows that it is not an accurate measure of nonprofit efficiency. Current thinking has changed and acknowledges that nonprofits must invest in their core administrative, human resources, governance, and fundraising functions in order to stay healthy and effective. To display the true cost of its programs, nonprofits can go beyond the minimum requirement of the standard to include a functional expense statement by nature that allocates supporting services (administrative and fundraising costs) to its program areas.

Whether the topic is liquidity or contributions or functional expenses or revenue recognition, having a grasp of the accounting principles behind FASB standards allows us to better tend to our organization’s financial well-being. There is far more to an accounting standard than a simple rule to follow or a guideline for compliance. When we know the concepts well enough, we can bring out the strategy within any standard.

Tags: FASB standards, financial strategy, functional expenses, fundraising, liquidity, nonprofit finance, nonprofit strategy, overhead myth, revenue recognition, Accounting, Nonprofit general, Strategic decision making | Comments Off on Strategy Meets Standards In Nonprofit Accounting