FASB financial reporting: What private foundations need to know
As a private foundation, you may be wondering how FASB’s new Presentation of Financial Statements accounting standards update will impact your not-for-profit grantees. While the new standard applies to all nonprofits, some of the changes will more significantly impact traditional nonprofits for a couple of reasons.
First, one significant, positive change relates to the liquidity and availability footnote requirement. This is completely new, and it may highlight potential challenges your grantee might be facing if the organization relies on a line of credit or an annual need to draw from endowment earnings or board-designated funds for operations. This new footnote will be a critical section of the financial statements for foundations to read and understand. Nonprofits are required to discuss both qualitative and quantitative factors in managing the organization’s liquidity needs — that is, how the organization plans to fund and pay for upcoming liabilities and commitments. This information could be an indicator that the nonprofit really needs your support.
One significant, positive change relates to the liquidity and availability footnote requirement. This is completely new, and it may highlight potential challenges your grantee might be facing.
Additionally, the new requirements call for more information to be disclosed about expenses. This is an area private foundations also will want to review carefully. The expanded disclosure is essentially a reconciliation between functional expense classifications required under current standards (for example, program, management and general, and fundraising) and natural classifications (such as salaries, benefits, occupancy, and supplies). The additional data could be instrumental to private foundations in understanding how the organization spends its grant funding. It could also be useful in determining where the organization needs additional support.
Other important changes relate to nonprofits' receipt of gifts (contributions) and consolidating the three net asset classifications into two. This means the statement of financial position and statement of activities will be a bit simpler. While the new requirements show less information on the face of the statements, nonprofit organizations are still required to track and manage gifts based on the donor time and/or purpose restrictions. The footnotes will still provide details on donor restrictions and also continue to disclose specific activity around donor- and board-designated (quasi) endowments. This information is potentially useful to foundations to assess the level of support a nonprofit receives from its donor base, including reliance on endowments for sustainability.
Overall, there are several other new standards on the horizon that will impact not-for-profit organizations. By understanding the new FASB presentation requirements and the impact on grantees, your foundation will be able to better assess potential grantees and help the not-for-profit organizations you already support carry out their mission.
The new financial reporting requirements noted above are effective for annual financial statements issued for fiscal years beginning after December 15, 2017 (December 31, 2018 calendar year ends and 2019 fiscal year ends).
As always, if you have any questions, we are happy to have more detailed conversations if needed.
