Recent Accounting Pronouncements and the Not-for-Profit Audit/Finance Committee’s Role in Implementation

In addition to understanding an organization’s finances, the fiduciary responsibilities of an audit/finance committee member include overseeing the accounting and reporting functions.  Following are overviews of two significant new standards that will soon impact not-for-profit financial statements, as well as questions that committee members can ask to ensure that the organization has sound plans for implementation.  

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, Leases. It provides guidance to increase transparency and comparability among organizations by reporting lease assets and lease liabilities – for both finance and operating leases – on the statement of financial position and disclosing key information about leasing arrangements. Effective for calendar years ending 2020 and for fiscal years ending 2021, an audit/finance committee should consider the following questions prior to the implementation date:

1. Has management dedicated enough time and resources to identify and properly account for each lease agreement?
2. How does the revised presentation of operating leases on the statement of financial position impact your debt covenants?
3. Are there certain ratios used by your funding sources or other stakeholders that may be impacted by the inclusion of operating leases on the statement of financial position?

In August 2016, the FASB issued ASU 2016-14, Presentation of Financial Statements of Not-for-Profit Entities. Effective for calendar years ending 2018 and fiscal years ending 2019, the objective of this standard is to improve the financial statement presentation by not-for-profit entities, focusing on net asset classification and related information in the notes, liquidity disclosures (how the organization manages its liquid resources), expenses by function and natural classification, and presentation of operating cash flows. The audit/finance committee should consider the following before implementing this standard:

1. Will the organization show single year or comparative financial statements? If comparative, the organization will need to gather additional information for the prior year.
2. What level of detail should be shown on the face of the financial statements vs. in the notes? For example, information about the nature and amounts of different types of donor-imposed restrictions can be shown in either location.
3. Are amounts included as board designated on the financial statements supported by an actual board resolution? If not, should these net assets be reclassified?
4. For the liquidity and availability of resources note, does the organization have a qualitative description on how it manages its liquid resources? This note disclosure should tell the story of available resources (supported by the quantitative components) and how these resources are used to manage cash flow.
5. Functional expense schedules are now required for all not-for-profit organizations. Does the organization have a documented policy on how its expenses are allocated across all of its functions? Have the enhanced disclosures around the methods used to allocate costs among program and support functions been drafted?
6. Considerations should also include what will be most meaningful to the users of the financial statements. Will changing the presentation have an impact on the users?

It is critical that the audit/finance committee discuss these issues with management in the near term. If management determines that the addition of the leases on the statement of financial position may impact the organization’s debt covenants or its funding levels, agreements with the bank, funding sources and other stakeholders may need to be modified. The audit/finance committee should make sure that management has a formal timetable for evaluating the requirements of these pronouncements, and to draft the new financial statements and necessary disclosures for the committee’s approval.

Early preparation is important for both of the above standards and will require additional efforts by management and the audit/finance committee. However, by properly planning for implementation, the committee and management can ensure that both internal and external stakeholders are prepared for the resulting changes.

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