Remember the days of sitting in your middle school writing class? Your teacher emphasized the importance of understanding who your readers were. Understanding your audience is a key component in communicating information. While opening a financial statement can be overwhelming at times, it can become even more confusing if you’re struggling to help your audience interpret the information.
With impending nonprofit financial reporting changes and recent modifications to state tax filing requirements, understanding your audience will be even more essential this upcoming fiscal year. Recognizing your audience will assist you in helping individuals understand how their organization will be impacted by these changes.
Impact of Nonprofit Financial Reporting Changes
Non-profits’ financial statements are utilized by multiple groups of individuals for multiple purposes:
- Board of Directors
- Current and future donors
- Government agencies for tax filing purposes
- Foundations who handle grant applications
Upcoming changes to the nonprofit financial reporting requirements under FASB ASU 2016-14 will require organizations to be mindful of how these changes will impact their users of the financial statements.
Each user may have a different purpose for the financial statements, which requires the non-profit organization to gain comprehension on how these upcoming changes will impact each group. The five most significant changes that could impact an organization’s financial statements are:
- Temporarily and Permanently Restricted Net Assets are consolidated into one line on the Statement of the Financial Position. Board designated funds remain classified as Unrestricted – Board Designated; however, note disclosure will be required to elaborate on the designations.
- The direct method for Statement of Cash Flows is permitted and the reconciliation to the indirect method for operating cash flows is no longer required.
- Qualitative and quantitative information about the liquidity and availability of resources to meet general expenditures in the upcoming fiscal year must be presented.
- The method by which functional expenses are allocated between program, administrative and fundraising is now required, in addition to reporting expenses by function and nature.
- Disclosing the components of investment income is no longer necessary, yet reporting net investment return is required in the notes to the financial statements.
Simplifying complex areas, such as the statement of cash flows, investment return and net assets, was done to assist the readers of the non-profits’ financial statements.
Tax Filing Requirement Changes
Financial reporting changes are universal changes to all non-profit organizations. One change specific to Pennsylvania non-profit organizations pertains to the threshold requirements for the type of financial statements required. The Pennsylvania Solicitation of Funds for Charitable Purposes Act’s recent modification impacts the type of financial statement requirement for the BCO-10 filing for the Organization based on gross annual contributions.
Some areas that organizations should consider if they are able to reduce their level of service from audit to a review include bylaw requirements and grant applications. Specifically for grant applications, an audited financial statement may be considered a requirement by the grant agency. Understanding the reader of the financial statements, as well as applicable by law and grant requirements, will assist the Board of Directors and finance committee in determining the required level of service for the organization.