Improved FASB Accounting Standard Helps Nonprofits Better Understand Financial Reporting Best Practices

In this day in age, it’s crucial for a business to understand what goes into financial statements and how to properly report finances. And while, technically speaking, nonprofit organizations are not required to follow generally accepted accounting principles (GAAP), it doesn’t mean nonprofits shouldn’t. It serves the nonprofit in an advantageous way, seeing as it gives people outside of the organization—donors, investors, grantors, watchdogs, etc.—a means of measuring the nonprofit’s performance.

The Financial Accounting Standards Board (FASB) released improved standard for nonprofit financial statement presentation, and these improvements were made to a major substandard that the FASB put out over 20 years ago. What sparked these changes is that the FASB’s nonprofit advisory committee (The Not-for-Profit Advisory Committee) suggested that it was time to look at some key areas and get nonprofit input from the public to find ways to make financial statements better and more understandable to the sector.

The FASB overhauled the previous accounting standard to help nonprofits tell a clear financial story—a collective set of improvements for things that they thought could be better.

In an exclusive interview with NonProfit PRO, Jeff Mechanick, assistant director of the nonpublic entities for the FASB, shares his insights on the improvements in the standard and how the improvements can help nonprofits better understand financial reports.

“Trust and accountability that is fostered by good financial reporting is really important for nonprofit organizations, just as it is for public companies. They want to maintain the ability to get donations, grants, loans and all other ways to fund what they do,” Mechanick said.

One of the challenges among nonprofits has been the inconsistent reporting on how and details behind how organizations spend their money. With these improvements, the FASB is trying to promote disclosures and the way the information is being presented.

Another challenge that the sector faces in terms of financial reporting is that users in nonprofit finances may not understand the terminology. The updated standard expanded requirements of this aggregation of expense information to provide a level of transparency over types of expenses for various functions a nonprofit has.

“All of this was aimed at trying to promote clearer, more transparent, more consistent, comparable information across the different types of nonprofits, so that donors, grantors, watchdogs and others can look at nonprofit financials and get a better, clearer picture of what's going on, how an organization is spending money, what kind of limitations there are because restrictions have been attached by donors and so on,” Mechanick said.

It should be noted that the standard is not a major change in a nonprofit’s accounting, but rather a presentation of how financial statements look. According to Mechanick, “This is directly important for the purposes of the GAAP statements that go to all sorts of users of financial statements, but also indirectly affects the IRS form 990.”

To learn more about the improvements in the accounting standard, click here.