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Member of Russell Bedford International, a global network of independent professional service firms.
In our recent Understanding Nonprofit Audits blog series, we discussed the ins and outs of a nonprofit financial statement audit. Now that the end of the year is approaching, we wanted to inform you of several important changes regarding your financial statements as a nonprofit organization. Here’s what you’ll need to know to have a successful planning and reporting process in 2018 and beyond.
The forthcoming changes aim to reduce the complexity and increase transparency in nonprofit financial statements, especially for potential donors. The update, Accounting Standards Update (ASU) 2016-14, requires new disclosures for your financial statements and may require your organization to adopt additional accounting policies. There are several components to the new format, but the most important changes are:
The number of net asset classes will be reduced from three to two. Previously, net assets have been categorized as unrestricted, temporarily restricted, or permanently restricted. With ASU 2016-14, assets will be categorized as either “donor-restricted” or “without donor restrictions.” In other words, donations are either allocated for a specific purpose per the donor’s instructions or can be used as your nonprofit board chooses. Enhanced disclosures will be required on donor restrictions, requiring you to describe the composition of net assets with donor restrictions.
A nonprofit board may set aside funds for their purposes, such as developing a specific program. Since the board is not a donor, those funds will be categorized as “without donor restrictions.” In that case, you’ll need to make sure that you provide financial statement disclosures which describe how those funds are appropriated based upon the board’s policies.
Your expense reporting will now need to include both the nature and function of your expenditures in one location. For example, you’ll need to determine whether rent expense should be allocated as program, general/administrative, fundraising, or a combination of these functions. You can present that information in either a separate statement, in the statement of activities, or in the financial statement disclosures. Since most nonprofits are reporting this information either on the Form 990 or in the financial statements, chances are you already have a policy in place. However, it may need to be revised for the new reporting standards, so check with your accounting firm for details.
For your investments, ASU 2016-14 requires that you net any investment fees or expenses against your investment returns. For example, direct expenses such as brokerage fees or investment salaries may need to get allocated against the net investment returns. However, you’ll no longer be required to disclose the components of your investment expenses. This is a perfect opportunity for your organization to review your current investment policies for recording investment returns and expenses.
You’ll now need to provide information on the organization’s liquidity by including both qualitative and quantitative information (such as how funds are managed to provide for general expenditures and the availability of such funds). A presentation will need to be provided that identifies those accounts that are easily converted to cash (such as cash equivalents, receivables and other accounts). This new stipulation is intended to give potential donors more transparency into your nonprofit’s liquidity.
The updates to your statement of cash flows is really just an adjustment to how they’re reported. Your statement of cash flows can be reported using either the direct or indirect method. Currently, if you choose the direct reporting method, you have to attach the indirect method reconciliation. After ASU 2016-14 is implemented, you’ll no longer have to attach your indirect method reconciliation with your direct method reporting.
If your nonprofit follows a fiscal year, these changes will be implemented in 2019. If it follows a calendar year, you’ll implement these changes in 2018. Either way, since nonprofit financial statements are in comparative form (the current year’s report is provided alongside the previous year), we recommend planning for these changes as 2017 comes to a close. That way, you’ll have the support and policies in place once the requirements take effect.
Remember, your financial statements are an opportunity to tell your organization’s story to potential donors. The new policies enacted by ASU 2016-14 enable a way for your nonprofit to reveal vital information to donors in a clear, understandable way. We recommend having a conversation with your accounting firm so you have a thorough understanding of the impact of these changes. If you have any questions, please contact us. We’d be happy to help you get your policies and support in place for the new financial statement reporting rules.
Now that you have determined the need for a nonprofit financial statement audit, it is time to select an accounting firm and begin the process. This can be an overwhelming experience, but it doesn’t have to be. With the right team on your side and all the documentation you need prepared ahead of time, you’ll be ready to execute a successful audit.
As soon as the need is determined, you can start the process of selecting an accounting firm for your financial statement audit. In addition to selecting a firm that’s certified to perform audits in the state of Illinois, you’ll want to make sure that you choose a team that truly understands your operations and transactions. It’s critical that the firm has extensive nonprofit experience since the regulations differ significantly from those of for-profit businesses. It is highly recommended to ask all potential accounting firms to provide a copy of their most recent peer review certificate and report.
After your firm has been selected, you’ll start the organizational and preparation processes. Your audit team should clearly communicate what documentation you’ll need to have ready initially. You’ll also meet with your auditors to understand what metrics, such as key balances from your balance sheet, will be important to the process. The auditors will go over your risk assessment and internal controls to ensure that they’re working properly. In a perfect world, those meetings should take place throughout the year so that nothing is missed. Finally, the team will review your accounting and personnel policies to ensure everything is up to date. Based upon these discussions, your audit team will determine the procedures that will take place during the audit.
Once you’re ready to move forward, the most critical element of a successful audit is good communication between the auditors and your internal team. The audit team will relay which key documents will be necessary. Having all of your documentation and reporting ready in advance of any on-site visits will save you time and money. Since most firms bill by the hour, the less time that’s spent on the audit means more resources to devote towards fulfilling your mission.
As a final note, there are going to be updates to the financial statements themselves. There are new reporting standards that will take effect for 2018’s audits. These changes are going to require major revisions to the current accounting policies and reporting for nonprofits. It’s important to start implementing these changes prior to the end of this year so that you’re prepared for next year. Click here for more information.
An unqualified audit report from the audit firm will provide reasonable assurances to your governing bodies, lenders, and donors that you’re running your organization responsibly. It can help open doors for more funding so that you’ll be able to pursue your mission to the fullest. Contact us today if you have questions about whether you need an audit or to see how we can make the process as seamless as possible.
Managing a nonprofit organization is quite a balancing act, and the IRS doesn’t make it any easier. Nonprofit-specific tax laws can be even more complicated than those regulations for for-profit businesses. Are you up to date on recent changes in nonprofit tax law? Check out our nonprofit news and tips to ease your 2017 tax season.
Uniform Guidance
Don’t make the mistake of thinking that uniform guidance does not apply to your organization because you aren’t using federal money. Often money awarded through states originates with the federal government. Be sure to confirm the initiation point for all funding your organization accepts.
Uniform guidance, enacted at the end of 2015 for the 2016 tax year, regulates how nonprofits account for federal awards in excess of $750,000. Uniform guidance, which was previously covered by the OMB A-133 audit, is designed to ensure that money awarded by federal agencies is being used as intended. Many organizations hire consultants to prepare them for this annual audit. An outside accounting firm must complete your audit within nine months of the end of your organization’s fiscal year.
Net Asset Classifications
For years you’ve been classifying your net assets into three classes: unrestricted, temporary restricted and restricted. The temporary restricted class is being combined into the restricted class, leaving only the restricted and unrestricted classes. This change will impact how nonprofit organizations’ financial statements are presented and is intended to reduce errors.
Extension Changes
In the past, the extension process had two parts. The first extension due May 15th (calendar year filers) extended the deadline for three months until August 15th. Then, if additional time was needed, a second extension could be filed on August 15th, extending the deadline another three months until November 15th.
For tax years beginning in 2016, the original May 15th extension will now extend the 990 return for six months, thereby eliminating the need for the August 15th extension. The extended return will be due on November 15th, 11 ½ months after the close of the year.
TOP THREE TIPS
If you have any questions about changes in nonprofit tax law or how to implement our nonprofit tips, call us today. Our nonprofit experts are ready to help you with your balancing act.
Hearing marketing advice from your accountant may be surprising and unexpected, but if you are working on your IRS Tax Form 990—the return filed by non-profit organizations—it’s exactly what you should hear. At Cray Kaiser, we refer to Tax Form 990 as your “resume for big donors.”
Yes, your accountant checks over every detail to be sure that the IRS—the number one audience for Form 990—continues to consider the organization tax-exempt. But did you know that Form 990 is also available to and frequently read by the general public?
Imagine a potential donor who is planning to make a large donation and is choosing among three organizations, one of which is yours. The donor pulls up the three 990 forms to learn more. She reviews mission statements, achievements and financials. She considers how much money went to the mission versus how much was spent on advertising and overhead. She examines Board of Trustees and senior management lists, possibly researching more about those involved with the organization.
How does your Form 990 compare? Will she choose your organization over one with a Form 990 that effectively communicates the mission of the organization and persuades readers to support the cause?
It’s not often that your tax form serves as a marketing tool, but in this case, that’s exactly what it is. Use this opportunity to persuade that donor with money to bestow that your cause it the most deserving one. And while you may not turn to your accountant for advice on your new logo or advertising campaign, the advice to use your Form 990 as a marketing tool can make the difference between getting that big donation or having it pass you by.
If you have questions about Tax Form 990, please contact Cray Kaiser today. We’re here to help!
