What Board Members Need to Know About Changes to Financial Statements

Jennifer Casacchia’s article was originally published on the ASAE website here. This article was republished with permission. Copyright, ASAE: The Center for Association Leadership (November 2018), Washington, DC. 

As association boards govern their organizations, they must prioritize compliance with important and recent updates in financial standards. These accounting standards offer boards the opportunity to tell their stories more clearly and powerfully to potential donors.

In 2016, the Financial Accounting Standards Board issued a new standard pertaining to nonprofit financial statements: Accounting Standards Update (ASU) 2016-14 [PDF].

While early adoption of the standard was permitted, most associations will be making changes to their financial statements for December 31 and beyond. The new rule requires associations to reformat their financial statements, ultimately making it easier to compare different organizations’ financials. It also aims to provide more context and detail behind the numbers, giving associations an opportunity to be more transparent and descriptive about how resources are used to further its mission.

An association’s board can leverage these new requirements to enhance their stewardship. As associations work to comply with and make the most of these new standards, board members should keep a few considerations in mind.

Tell Your Story With Designations

The board’s main priority is to guide the organization’s strategic direction so it can continue advancing its mission well into the future.

Often, this means that the board reviews assets and ensures the association has the necessary funds to account for future needs, such as technology upgrades, program expansion, or new facilities.

To allocate funds to these projects, boards can designate net assets that do not have donor restrictions. Board action is typically required to establish or spend from board designations; however, in some cases, such decisions could be delegated to an association’s management.

The board should establish policies regarding the designation of net assets, including the purpose and criteria for spending from such funds.

The new accounting standard requires disclosure of the amounts and nature of board-designated net assets, giving boards more opportunity to explain the various purposes relating to net assets they have set aside. The board can use this opportunity to build a compelling narrative around the organization and its preparation for the future. For example, if the board designates funds to open a second location, it could discuss the organization’s growth and need for additional space in the footnotes.

A best practice for the board is to review designations at least annually to consider their impact on the liquidity and availability of resources. An association board should scrutinize designations, liquid assets, and spending policies to confirm it is making the best financial decisions for the organization and use the footnotes of its financial statements to explain how these decisions allow the association to advance its mission.

Pay Close Attention to Liquid Assets

The new accounting standard requires associations to make qualitative and quantitative disclosures about how it manages its resources and its ability to meet its general operating expenses in the coming year.

An association’s financial statement footnotes must provide a narrative description of how the organization manages liquidity, as well as numeric information about any limitations on the use of financial assets. Limitations may come from donors, legal, or contractual restrictions, or self-imposed limitations, such as board designations.

For well-run associations, the new rules allow them to shine a brighter light on stewardship. As they prepare to comply with this new disclosure requirement, association boards should take a hard look at where they currently stand. If the association doesn’t have the funds needed to pay its bills, the board may consider ways to build up an operating reserve or obtain financing. On the other hand, if the organization has excess liquid assets, the board may decide to invest more money into programming.

By ensuring the organization strikes an appropriate balance when it comes to its management of financial assets, the board can secure the necessary cash flow to pay bills and dedicate any extra assets toward furthering the organization’s mission and future needs.

Revisit Endowment Spending Policies

Associations must also include additional disclosures about underwater endowment funds under the new standard. These funds result when the current fair value of a donor-restricted endowment falls below the amount the association is required to permanently retain in the fund.

The new disclosures include the board’s interpretation of the association’s ability to spend from underwater endowment, as well as the spending policy and any actions taken during the year to spend from these funds. Boards must update their current endowment spending policy if it does not address underwater endowment funds.

The overarching themes of the new financial statement standards are transparency and clarity. These new standards prompt associations to provide more details about how the organization deploys its funds to meet its goals.

The boards that view these new standards as an opportunity to make a compelling case to members and donors will put their associations in the best position for long-term success.

Jennifer Casacchia, CPA

Jennifer Casacchia, CPA, is an audit senior manager in our not-for-profit and higher education practices.