Rethink Your Nonprofit’s Chart of Accounts, Part II

Last month we published the first installment of a two-part series discussing implementation of the new not-for-profit financial reporting model, as viewed through the lens of the entity’s chart of accounts.

By now, you likely have taken some steps to prepare for implementation of the new not-for-profit financial statement presentation standard:

Read through the standard.

Attended training to understand the forthcoming changes.

Had auditor/client discussions regarding the impact on audit timing and planning.

Selected team members to lead implementation of the new standard.

Decided whether to early-adopt.

When you’re ready to dig in further, the chart of accounts is a smart place to go. The standard will affect several financial statement line items, so it’s important for not-for-profits to create a plan to adjust their chart of accounts during 2017 or 2018.

The timing of the adjustments will depend on your organization’s fiscal year-end and whether you plan to early-adopt the standard, which is effective for annual financial statements issued for fiscal years beginning after December 15, 2017. The exact types of adjustments will depend on the accounting system you use. If you haven’t already done so, be sure to discuss implementation timing with your external auditor to prevent any potential audit interruptions, and to determine if comparative financial statements will be presented in the year of implementation.

The Financial Accounting Standards Board’s (FASB) Accounting Standards Update No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities will impact the chart of accounts in five areas: liquidity, net assets, investment return, statement of cash flows and expense reporting. Recommendations related to liquidity and net assets were discussed in a previous blog post. This post addresses the remaining areas.

Investment Return

Under the new standard, investment expenses can no longer be presented “gross” with other expenses in the financial statements. Instead, investment expenses will be netted against investment returns. To accomplish this, consider the following recommendations:

If your organization is currently reporting investments on a gross basis, reclassify external investment expenses from an expense account to an investment returns contra-revenue account.

Review how direct internal investment expenses are being accounted for. Determine how those will be tracked in the chart of accounts to allow for netting against investment returns for financial reporting purposes. Your organization may need to re-evaluate its allocation methodology for internal investment expenses, create a new account or adjust tags and dimensions.

Statement of Cash Flows

Organizations may continue to use either the direct or indirect method for reporting operating cash flows under the new standard. However, organizations using the direct method will no longer be required to show the indirect reconciliation. We recommend the following:

Discuss with senior management and the finance committee which method the organization would like to use going forward. Both methods are often included as standard reports in accounting software packages.

Expense Reporting

The new standard requires organizations to present an analysis of expenses by both function and nature in one location and to include a description of the method used to allocate costs among program and support functions. Consider the following recommendations to comply with these requirements:

Review any expenses currently being netted against revenues, such as cost of goods sold or special events, and determine if changes to the account structure need to be made. For this analysis, the standard specifically prohibits the inclusion of investment expenses netted against revenue, as discussed above.

Consider revisiting the functional coding of expenses if that hasn’t been done recently, as functions may have changed over time.

All organizations will need to disclose their allocation methods, so review the allocation tables and expense holding accounts to ensure they still support the documented methodologies.

Since your staff will be expending the effort to learn the new requirements and potentially update the chart of accounts, consider whether additional work is needed. Specifically, this may be a good time to clean up or reconfigure the chart of accounts to support the organization’s current financial reporting needs or address any business-model changes. Looking beyond the chart of accounts, remember to reflect changes to the terminology used in your current financial reports, and consider whether additional reports may need to be created.

To learn more about the not-for-profit financial reporting changes, visit the AICPA Not-for-Profit Section’s Financial Reporting Resource Library.

Cheryl R. Olson, CPA, CGMA, Director of Not-for-Profit Consulting, Clark Nuber, PS. Cheryl provides consulting, training, and advisory services in the areas of operational capacity, finance, and governance. Cheryl is a member of the not-for-profit services team and software solutions team. She volunteers on the AICPA Not-for-Profit Advisory Council and is an instructor for AICPA’s Not-for-Profit Certificate II, a video-based eLearning program for not-for-profit professionals and their business advisors.

Diane Shey, CPA, Lead Software Implementer, Clark Nuber, PS. Diane oversees deployment and training of various accounting and fundraising software programs. Her clients include not-for-profits, associations, and foundations, as well as organizations providing healthcare, arts and recreation, and social services.

Rethink Your Nonprofit’s Chart of Accounts, Part II

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