Significant Changes Affecting Your Financial Statements

Published in INSIGHT - Spring 2018
Rebecca M. DaVee, CPA
Church Administrator - Broadway Baptist Church, Fort Worth, Texas

2018 brings new reporting and disclosure requirement for churches and other nonprofit organizations. It’s been over 22 years since there were significant changes to the nonprofit accounting standards – however the Financial Accounting Standards Board (“FASB”) wanted financial data to be more relevant to the end user. Those who are “charged with governance” (i.e., board of directors, board of trustees, etc.,) need to understand financial information. Financial disclosures provide insight into the data reported in the financial statements.  
Disclosures explain accounting policies and provide a roadmap of what is included in various account balances. Some of the new disclosure requirements help the board understand:
  1. Liquidity
  2. Underwater endowments
  3. Board designated funds 
In April of 2015 a draft of this new accounting standard was issued for public comment and in August of 2016 the standard was published with two phases of implementation. This standard was not designed to provide a complete overhaul of the church’s financial statements – but instead was designed to update, improve net asset reporting, provide more useful information to donors, creditors, grantors regarding financial performance, cash flows and liquidity, plus allow churches to “better tell their story”. Phase one is effective for years ending in 2018 and improves the following reporting requirements:
  1. Net asset classifications – now there are two classifications (instead of three) – unrestricted and donor restricted.
  2. Expense reporting – churches are now required to report expenses by nature and function.
  3. Cash flow reporting – churches that report information under the direct method are no longer required to reconcile operational activity reported by the indirect method. 
Phase two of the accounting standard is expected to clarify the term “operations” and align measures of operations (i.e., financial performance) with measures of operations in the statement of cash flows. The FASB will attempt to correlate financial performance of business entities with those of a nonprofit organization.  
Churches receive significant resources and operate in advancement of their mission, rather than to achieve a profit objective.  Their stakeholders represent members of their congregation and local community instead of stockholders. These new reporting standards amend financial statements and require churches to perform the following:
  1. Net Asset Reporting - present on the face of the statement of financial position (i.e., Balance Sheet), amounts for two classes of net assets – with restrictions and without restrictions. 
    1. Board designated net assets (component of net assets without restrictions) are reported in a footnote and represent self-imposed limits on the use of resources. 
    2. Donor restrictions are reported in a footnote to report how the funds are to be used.
  2. Modify Statement of Activity – no longer are their three classes of net assets. Churches report activities from unrestricted sources and donor restricted sources.
  3. Report financial resources available to meet cash needs for general expenditures within one year of the balance sheet date.
    1. Financial resources defined qualitatively and 
    2. Quantified either on the face of the balance sheet or in a footnote.
  4. Report expenses both by natural classification and their functional classification. This information can be reported on the face of the statement of activities, separate statement of functional expenses or in the footnotes.
  5. Report policies affecting underwater endowment, and any actions taken during the period concerning appropriations from endowment funds. Disclosure requirements include: 
    1. Aggregate fair value of the funds
    2. Aggregate of the original gift amounts required by law/donor to be maintained
    3. Aggregate amount by which the funds are underwater
The FASB intended these changes to improve the usefulness of information provided to stakeholders, reduce the complexities or costs for preparers or users and improve usefulness and reduce complexities or costs. Eliminating the distinction between resources with permanent restrictions and those with temporary restrictions from the face of financial statements will reduce complexity. Enhanced disclosure in notes to financial statements will provide useful information about the nature, amounts, and effects of various types of donor-imposed restriction. These often include limits on the purposes for which the resources can be used as well as the time frame for their use. Simplifying the face of financial statements together with enhancing disclosures in notes will enable churches to continue to provide relevant and perhaps alternative breakouts that provide more useful information about their resources.