[Lnc-business] FASB changes overview (background for agenda item in tomorrow's meeting)

[Joe Bishop-Henchman]

New FASB Changes

1. Nonprofits must manage cash, budget, and book. What are the 
differences?

A. Cash is a snapshot at a particular moment of liquid assets able to 
meet current and future obligations. Best practice is to have a cash 
flow projection so as to avoid negative cash flow at any point in time 
in the near-future, through revenues exceeding expenses, availability of 
liquid net assets, and/or access to a line of credit.

B. Budget is a period of time (usually annual) listing anticipated 
revenues and expenses. Best practice is for adoption of an annual budget 
where revenues equal or exceed expenses over the budget timeframe, to 
prevent exhaustion of net assets.

C. Book is a continual classification of financial transactions, 
identifying revenues and assets by their restrictions on their usage 
(receivable vs. cash, liquid vs. illiquid, donor or legally restricted 
vs. unrestricted, released vs. unreleased), and expense obligations and 
liabilities by their function (program, development, management) and 
nature (salaries, rent, etc.). Best practice is for accuracy of all 
recording (including accurate reporting of time spent by staff by 
function and nature) and for unrestricted net assets to be not in a 
negative position at any time.

2. What is FASB?
Financial Accounting Standards Board. They create Generally Accepted 
Accounting Principles (GAAP), the best practices for accounting and 
financial statements by non-profit entities. A non-profit entity cannot 
get a clean audit without adhering to FASB standards.

3. What is FASB doing differently?
FASB has announced a revision in financial reporting standards for 
non-profits, its first since 1993. The new standards take effect for 
nonprofits in their fiscal years starting after December 15, 2017.

A. Donor Restriction Classification
Current FASB standards focus on type of donor restrictions 
(unrestricted, temporary, permanent). The new standards focus on whether 
assets are restricted or not (with restrictions, without restrictions). 
Nonprofits still must track net assets and follow any donor 
restrictions, but no longer need to distinguish between temporary and 
permanent restricted net assets.

B. Liquidity Restrictions
Assets and liabilities statements will now need to disclose any 
limitations on asset availability to be used for current expenses, be it 
the nature of the asset (illiquid or receivable), donor or other 
contractual restrictions, or board restrictions. For organizations who 
have positive net assets but ones that are not in liquid or unrestricted 
form to satisfy current obligations, this will more clearly show cash 
flow shortfalls.

C. Expense Detail
Currently nonprofits need only categorize expenses as three buckets: 
program, development, and management. The new FASB rules require further 
detail as to their nature (salaries, travel expense, rent, etc.). Most 
nonprofits already disclose this information on their IRS Form 990.

C. Investment Expenses
Nonprofits no longer need to report the amount of netted out investment 
expenses on investment income. Nonprofits must still report the net 
income received, but determining how much was netted has proven 
difficult.

D. Cash Flow Statement
Nonprofits may now choose either direct or indirect presentation of cash 
flow, instead of having to do both.

E. Overhead Allocation
Nonprofits must now disclose the methodology for calculating overhead 
and apply it consistently.

JBH

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Joe Bishop-Henchman
LNC Member (At-Large)
joe.bishop-henchman at lp.org
www.facebook.com/groups/189510455174837