On November 9, Aronson LLC, Arent Fox, and Morgan Stanley hosted an executive summit for exempt organizations that featured strategies for making and saving money, and tips on top governance issues. Missed the event? Here is a brief recap. The event kicked-off with keynotes delivered by former United Way CEO and Chair of the Alexandria Chamber of Commerce Joe Haggerty, and former US Senator and Congressman from North Dakota and current Senior Policy Advisor at Arent Fox Senator Byron Dorgan.
“Nonprofits should be providing the appropriate level of information to the public, this includes full disclosure, open conversations, innovate use of required reporting, and tying metrics to outcomes,” said Mr. Haggerty. “For example, instead of trying to hide salary info in an appendix, the United Way included its entire compensation plan in the 990 and added information on who they benchmark against and the overall philosophy of compensation.”
With a new administration and Congress set to take control in January, Senator Dorgan flagged several issues exempt organizations should be focused on. Including:
The first panel discussion featured Arent Fox Nonprofit Leader Richard Newman, Aronson LLC Nonprofit and Association Industry Services Group Partner Rob Eby, and Vice President and Financial Advisor for Morgan Stanley Matthew Teems. The group focused primarily on strategies for making and saving money. Those guidelines include:
Good governance was the central theme for the second panel, which included Mr. Teems, Aronson LLC Nonprofit and Association Industry Services Group Partner Gregory Plotts, Arent Fox Nonprofit Partner Sean Glynn, and Vice President of Commercial Insurance at Sahouri Insurance Allen Hudson. The group focused on investment committee responsibilities, audit committee responsibilities, and new accounting standards. Major takeaways include:
Additionally, three new Accounting Standards, which will take effect soon include: Financial Presentation for Exempt Organizations (Effective in 2018); Revenue Recognition (Effective in 2019); and Lease Accounting (Effective in 2020).
In August 2016 the Financial Accounting Standards Board (FASB) announced the long anticipated Accounting Standards Update (ASU) “2016-14—Not-For-Profit Entities (Topic 958): Presentation of Financial Statements of Not-For-Profit Entities”. These new guidelines, the first changes to be made to financial reporting in over 20 years, will have a big impact on exempt organizations and their financial reporting. The updated standard is effective for fiscal years beginning after December 15, 2017, and has been released now to give organizations time to prepare.
This new ASU will impact all exempt organizations, and is the result of a determination by the FASB that financial statements of exempt organizations could be improved to provide more useful information to donors, grantors, creditors, and others. The amendments in ASU 2016-14 are the first of a two-phase project intended to make short-term improvements that address many of the issues identified by the FASB, including:
Net Asset Classification Requirements
There are currently three classes of net assets—unrestricted, temporarily restricted, and permanently restricted—that will be combined into two. Unrestricted net assets will become “net assets without donor restrictions,” while temporarily and permanently restricted net assets will collectively become “net assets with donor restrictions.” The notes to the financial statement will include expanded information so the user will be able to understand the timing and nature of the restrictions and the composition of net assets with donor restrictions at the end of the period.
The update will also require the enhanced disclosures about the amounts and purposes of governing board designations, appropriations, and similar actions that result in self-imposed limits on the use of resources without donor-imposed restrictions as of the end of the period.
Underwater endowments will now be classified in net assets with donor restrictions instead of the current classification in unrestricted net assets. Expanded notes will also be required to disclose amounts underwater and to present plans for reducing or not spending from these funds.
Investment income will now be reported after deducting external and direct internal investment expenses. The disclosure of investment expenses is permitted but will no longer be required.
Transparency and Utility of Information in Assessing Liquidity
New disclosures will need to be made regarding the management of liquidity and the financial assets available to meet near-term demands for cash. The disclosure will include both quantitative and qualitative information, including factors that may impact the financial availability such as the nature, imposed external limits, or imposed internal limits. Quantitative disclosures should include total assets, total liabilities and amounts that are not available to meet cash demands within one year of the balance sheet date due to restrictions.
Reporting Expenses by Function and Nature
Reporting of expenses by both function and natural classification in one location will be required for all organizations on a separate statement, on the face of the statement of activities, or in the footnotes. The updated reporting may require changes in internal procedures to ensure that this level of detail is tracked to accurately comply with the requirement. Additional disclosures will also be required regarding methods used to allocate costs among program and support functions.
Presentation of Cash Flow Information
Under the new standard, exempt organizations may present operating cash flows using either the direct or indirect method and will no longer be required to present or disclose the indirect method of reconciliation if the direct method is used. This is intended to provide greater flexibility and the freedom to choose the method that best serves each entity’s informational needs.
The FASB has stated that the overall expected benefits of the improvements justify the perceived costs that they may impose. A future second phase of the project will address additional issues surrounding whether and how to define a measure of operations and aligning measures of operations in the statement of activities with measures of operations in the statement of cash flows. There is currently no expected timeframe for the completion of the second phase.
Adoption of the standard will result in significant changes to financial reporting and disclosures. With early adoption permitted for future year ends and the final implementation deadline quickly approaching, we encourage exempt organizations to begin preparing for the transition.
We are here to help you navigate these changes. Experts from Aronson’s exempt organization team will come together to discuss the impact this new standard may have on your organization. We are offering a free webinar on Wednesday, October 26th, 2016 to explore some of the main issues and help participants begin to address compliance questions.