Top Three Questions for Implementing the New Nonprofit Reporting Model
ASU 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements for Not-for-Profit Entities, made targeted improvements to the financial reporting model. The ASU was effective for fiscal years beginning after December 15, 2017. All calendar year-end entities have adopted the new model, but there continues to be implementation questions from entities with alternative reporting periods.
Can the allocation of expenses by function and nature be drafted to match the nonprofit’s grant reporting or internal budgets? It depends. Only if the method for allocation of expenses is consistent with GAAP guidelines. Certain costs that directly benefit more than one function should be allocated. However, there is no “indirect” allocation of expenses that may currently be applied by the entity in grant or internal reporting.
The ASU clearly defines which expenses are permitted to be allocated to programs vs. supporting services. The modified definition of management and general activities includes all supporting activities that are not directly identifiable with one of the other functions. For example, the cost of the human resource department is generally not allocated to any specific program and should remain as a component of management and general activities under the new ASU.
Can required liquidity and availability disclosures be fully satisfied by a classified statement of financial position? No. Both quantitative and qualitative information must be disclosed to provide context as to how the entity ensures it can meet general expenditure cash needs for the next year. Limitations in contractual agreements with creditors, use of budgets, accounts receivable collection policies, investment guidelines, and other matters may be necessary.
Must reporting of investment return be net of direct internal expenses? Yes, if material. Accurately allocate internal salaries, benefits, and other expenses directly associated with supervising the strategic and tactical activities involved in generating investment return. This includes the development and execution of an investment strategy and monitoring external investment management firms. This does not include general accounting staff costs.
Learn more about auditing in nonprofits in Jennifer Louis’s webcast, Fraud and Abuse in Nonprofit and Nonprofit and Government Environments.