Proposed changes to nonprofit financial reporting

By Chris Mennel, audit manager, Alerding CPA Group | 

A new proposed accounting standard could dramatically impact the current financial reporting methods for the more than 1.5 million nonprofits in the United States. Financial reporting in nonprofits was largely affected in 1993 by the issuance of Financial Accounting Standard No. 116 and Standard No. 117 – two standards that accountants and bookkeepers have come to know very well.

These standards created the three classes of net assets that are used today (unrestricted, temporarily restricted and permanently restricted) as well as many other financial statement components that small to large nonprofit organizations deal with on a regular basis.

Although these changes have been in place for over 20 years, many non-accountant board members and others continue to struggle with the concepts behind nonprofit financial statements. In an effort to improve the usability of these documents, the newly proposed accounting standard would:

  • Create two classes of net assets (unrestricted and restricted) instead of the current three;
  • Require the Statement of Cash Flows to be prepared under the direct method of cash flows instead of the indirect method;
  • Require all nonprofits to report expenses by nature and function. Currently, only voluntary health and welfare organizations are required to present a statement of functional expenses;
  • Require certain reclassifications within the Statement of Activities in order to present new operating measures; and
  • Provide additional changes to the current presentation of financial statements.
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