Nonprofit accounting is about demonstrating financial stability, so that the Organization will be around a long time in order to fulfil its mission throughout the community.
Reserve Policy for Non-Profits
Nonprofits are allowed to receive more revenues than expenses, which will hopefully produce reserves for a rainy day. Be sure your nonprofit has implemented a reserve policy, specifically tailored to the unique working capital, risk and future opportunity needs of your organization.
All companies are now required to assess all of their major revenue streams that are subject to the new five step analysis of exchange revenues called ASC 606, but nonprofits are also required to adopt a new revenue pronouncement for non-exchange revenues (grants and contributions) called ASU 2018-08. These two new revenue pronouncements will require expanded footnote disclosures and assessment documentation by company management.
Updated Financial Reporting
A recent accounting pronouncement for nonprofits included updated financial reporting, which revises the equity section to account for revenue transactions as either with or without donor restrictions. Donor restrictions are either by time or purpose. This newer standard includes expanded descriptions of expense allocations, makes the reconciliation between the direct and indirect method of cash flows unnecessary, and introduces a brand-new disclosure for liquidity, which is not required for for-profit companies.
Review the new liquidity footnote in detail. Are the Financial Assets Available for General Expenditures negative, or appear low? When compared to the Statement of Functional Expenses, how many days of expenses does it represent? Nonprofit management have been worried if a potential donor thinks this number is too high, it may impact future donations. Other nonprofit management have worried if the potential donor thinks the number is too low, it may question the financial governance of the Organization. Since this footnote is still relatively new, financial statement readers’ reactions to it are still evolving. The key is educating the reader through utilization of the qualitative portion of the footnote to explain as much as possible about the Organization’s liquidity management.
Uniform Guidance Compliance
If the Organization receives over $750,000 of federal funds, are they in compliance with the uniform guidance? These are audit procedures in addition to the financial audit, which will test federal grant expenditures for proper internal controls around financial reporting and grant compliance. Any findings in this area will be a part of the public record.
Work With an Experienced Non-Profit CPA
Look for a CPA firm that works with multiple nonprofit organizations, so their entire team will have experience in identifying best practices, so they can be shared with all of their nonprofit clients. Marshall Jones. has a long history of providing tax, audit, and advisory services to a wide variety of nonprofit organizations, including charities foundations, churches, private schools, professional and trade associations, cultural, scientific, and government institutions. Contact us today for more information!