Financial Reporting Standards for the Not-For-Profit Organization

Introduction 

Also known as the non-profit organizations (NPOs), the not-for-profit organizations are set up to take care of a particular social issue that a community may be facing. The social problems could involve, among other things, hunger, drought, floods, and outbreaks of disease epidemics (Bryson, 2018). Different from the other profitable institutions, the NPOs spend their revenues on catering for the issues that a community faces at large. That is to say that the income is never shared with the leaders of the company or its stakeholders (Lee & Nowell, 2015). In the United States of America, the NPOs are exempted from taxation (Michalski, 2016). They can operate from the religious, scientific, or educational perspective, among others (Anheier, 2014). One of the largest charitable institutions in the United States of America is the United Way Worldwide (Barrett, 2016). The United Way Worldwide is currently based in Alexandria, Virginia, the United States of America. The organization was founded in 1887 in Denver, Colorado, the United States of America (Barrett, 2016). 

Updates for financial reporting 

Expense 

In the United States of America, the Financial Accounting Standards Board (FASB), located in Norwalk, Connecticut, has various guidelines for the financial reporting on the expense reports of the NPOs in the country such as the United Way Worldwide. The FASB also comes up with the standard principles of accounting that can be used by all organizations in the country to report on their financial statements. The nonprofit organizations report on their expense account updates differently from the other profit-based businesses in the United States of America. The NPOs such as United Way Worldwide spend their revenue differently from the other organizations in the United States of America (Murray, 2018). 

In the NPOs, expenses are recorded in the cash flow statements of the organizations. A significant similarity between the nonprofit and the profit organizations is that both have to spend money. However, unlike the profit-based firms, the NPOs spend their money taking care of the social issues that affect the societies in their day-to-day lives and not plowing the money back to their investments. The FASB requires the nonprofit organizations such as United Way Worldwide to record their expenses in their cash flow statements. The primary goal of the nonprofit organizations as far as the cash flow statement is concerned is to maximize their impact on the society (Murray, 2018). 

Just like in the for-profit organizations' cash flow statements, the nonprofit organizations also need to come up with forecasts on their expenses to monitor how they perform as far as their strategic goals are concerned. The FASB enforces that in the United States of America. The nonprofit organizations lack flexibility in their expenses since the funds received have to be accurately used in the projects it was meant for, and therefore in case another issue comes up, the organization may not have the ability to cater for it first before the others. That is different from the for-profit organizations (Hoerrmann, 2014). 

Technically, the nonprofit organizations are not strictly required by the United States of America's laws to follow the generally accepted accounting principles (GAAP). Nevertheless, that does not imply that they are not required to provide updates on their expense reports, as stipulated in the policies put in place by the FASB. The FASB recently came up with updated guidelines for the financial reporting by the nonprofit organizations. The new guidelines replaced those that the FASB had come up with about two decades ago. The leadership of the FASB, concerning the newly introduced guidelines for expense reporting, emphasized that trust and accountability are the two most important virtues that the nonprofit organizations need to put in place to avoid financial fraud cases that are on the rise in the United States of America (Murray, 2018). 

One of the most significant challenges in the expense reporting and updating among the nonprofit organizations is the inconsistency of the reports, which leads to erring in the financial reporting. The FASB is working round the clock to address that challenge. One of the best solutions to the problem that the FASB has come up with is the promotion of disclosures and educating the NPOs on how to best report their financial statements (Te, 2018). 

Reduction in net assets 

Net assets may reduce their value in the various businesses due to some reasons. One of the reasons is economic conditions such as instability of the currency across the globe. The other reason is the market factors such as dropping in the prices owing to increasing levels of competition and increase in the number of similar organizations. The reduction is recorded as an expense and has a lowering effect on the organizations net income. Just like the for-profit organizations, the nonprofit organizations are also faced with a reduction in the net assets that they own (de Andrés ‐ Alonso, Garcia ‐ Rodriguez & Romero ‐ Merino, 2015). 

The net assets of a nonprofit business are recorded on the balance sheet of the company, which indicates the financial position of the company. The balance sheet of a charitable company is prepared at the end of every quarter and the end of every fiscal year of the organization. A nonprofit organization in any part of the world classifies its net assets according to the specific restrictions that the donor puts in place. In the case where a donor does not specify how the money they have given should be used, the money is recorded under the unrestricted net assets category. 

According to the new directive by the FASB, the current assets of the NPOs will be classified into two types, unlike the previous three categories. The first group will involve the donations with restrictions and the second group will have contributions without restrictions. The FASB has come up with the guidelines that necessitate the NPOs to reveal the amount of money under the assets with donor restrictions. That will disclose how the net assets of the companies are faring to prepare them to handle any impending net asset reduction scenarios. 

As aforementioned, the reduction in the net assets of the nonprofit organizations may lead to decrease in the net income of the company. The decline in the net assets of the organization may also lead to the deficiency of the assets. In the economics approach, asset deficiency in a venture refers to a state where the liabilities of a company are more than the assets that the company owns. That leads to a financial drawback since the company soon becomes unstable. Many nonprofit organizations across the world operate on a deficit due to their expenses exceeding their income. The FASB as come up with ways for the NPOs in the united states of America to deal with the reduction in the net assets and record it accurately in their financial statements (Keefer, 2014). 

The FASB has come up with guidelines that ensure that the NPOs report their available assets accurately. The FASB, in its new rules, has stated that the organizations need to provide both qualitative and quantitative reports on their available assets. That is meant to give a breakdown of how the companies are using their liquid resources to meet their daily requirements. Through that, the FASB has targeted at ensuring that the NPOs in the United States have provided a report of their assets so that a decline in the net assets is notable. The earlier the issue is detected, the earlier the solutions to it can be given to the companies involved (Mulherin, 2018). 

Disclosure on liquidity 

Liquidity has been defined as the availability of the assets to be sold or purchased without having any adverse effects on the organizations' financial performance. There are liquidity ratios that the NPOs in the United States of America such as United Way Worldwide can use to determine their business performance. One of the coefficients is the current ratio. Just like the for-profit organizations, the NPOs have expenses too. The current ratio in the organizations ascertains whether the NPOs have sufficient funds to pay for its current financial obligations. A current ratio of between two and three means that the NPOs can comfortably use its funds to take care of the business goals it has set (Ripianzi, 2015). 

The other ratio that can be used is the quick ratio. The quick ratio determines whether an organization has enough money to pay for its liabilities without selling its inventory. A ratio of between one and two means that the NPOs can comfortably take care of its expenses without touching its stock. The other ratio is the organizational liquidity funds indicator. It determines how many months that the organization can go without touching its liquid assets. It is assumed that the organization will have no additional income during that duration. The higher the ratio for the NPOs, the higher the ability the organization has to stay without depleting its liquid assets (Ripianzi, 2015). 

The FASB had some concerns in the past over the not-for-profit organization in that they did not understand the various aspects of the liquidity in the institutions. One of the most workable solutions that the FASB has come up with to address the issue is the requirement that all the nonprofit organizations, the United Way Worldwide included, have to disclose their liquidity and information pertaining the liquidity ratios in their financial reports. The reports will communicate their abilities to meet their daily expenditures by using the income they will have amassed over time. A trend can then be established to gauge the financial performance regarding the liquidity ratios over time (National Council of Nonprofits, 2018). 

The disclosure of the liquidity information for the NPOs such as the United Way Worldwide has posed several challenges to the organizations. The most significant problem it has raised is that the preparers of the financial information in the NPOs have lower knowledge concerning including the ratios since the new directive by FASB goes beyond standard economic data they have been providing over time. That is to mean that the preparers of the financial information have to acquire extra knowledge to handle the liquidity ratios in the nonprofit organizations. If not so, the financial statements of the NPOs will have various errors that will deter them from being accurate (National Council of Nonprofits, 2018). 

To solve the challenge of the lack of knowledge in the disclosure of the liquidity ratios among the preparers of the financial reports in the nonprofit organizations, the organizations have to have an implementation plan for the same. The implementation plan is supposed to guide the preparers in their quest to gather the necessary knowledge they need to invest in the reporting of the financial statements, and precisely including the liquidity ratios information (National Council of Nonprofits, 2018). 

Conclusion 

Financial reporting for the nonprofit organizations in the United States of America does not necessarily have to follow the GAAP principles for the accounts reporting for the for-profit organizations. The NPOs such as the United Way Worldwide update their accounting information under the FASB. The FASB enables the organizations to publish their expense reports, their liquidity information, and the reduction in the assets of the companies. The FASB has come up with new principles to replace the older ones and ensure that the nonprofit organizations can report error-free accounting information that accurately indicates their financial position. 

References  

Anheier, H. K. (2014). Nonprofit organizations: Theory, management, policy . Routledge. 

Barrett, W. P. (2016, December 14). The largest U.S. charities for 2016. Forbes . Retrieved from https://www.forbes.com/sites/williampbarrett/2016/12/14/the-largest-u-s-charities-for-2016/#5f85a58d4abb 

Bryson, J. M. (2018). Strategic planning for public and nonprofit organizations: A guide to Strengthening and sustaining organizational achievement . John Wiley & Sons. 

De Andrés ‐ Alonso, P., Garcia ‐ Rodriguez, I., & Romero ‐ Merino, M. E. (2015). The dangers of Assessing the financial vulnerability of nonprofits using traditional measures. Nonprofit Management and Leadership , 25 (4), 371-382. 

Hoerrmann, P. (2014, May 20). Cash-flow forecasting in non-profit organisations . Retrieved from http://180dc.org/cash-flow-forecasting-in-non-profit-organisations-necessity-components-insights-patrick-hoermann/ 

Keefer, A. (2014, March 26). Net asset deficiency for a non-profit . Retrieved from http://smallbusiness.chron.com/net-asset-deficiency-nonprofit-81502.html 

Lee, C., & Nowell, B. (2015). A framework for assessing the performance of nonprofit Organizations. American Journal of Evaluation , 36 (3), 299-319. 

Michalski, G. (2016). Nonprofit Organizations. Global Encyclopedia of Public Administration, Public Policy, and Governance , 1-5. 

Mulherin, E. (2018, February 13 ). FASB's new financial reporting rules for nonprofit organizations | what you need to know . Retrieved from https://www.councilofnonprofits.org/thought-leadership/FASB-s-new-financial-reporting-rules-nonprofit-organizations-what-you-need-know 

Murray, J. (2018). Changes to reporting expenses by nonprofit organizations – HoganTaylor . Retrieved from http://hogantaylor.com/changes-to-reporting-expenses-by-nonprofit-organizations/ 

National Council of Nonprofits. (2018, April 6). Understanding the new FASB accounting standards? An overview. Retrieved from https://www.councilofnonprofits.org/tools-resources/understanding-the-new-FASB-accounting-standards-overview 

Ripianzi, J. (2015, October). How can I measure the liquidity of my nonprofit ? Retrieved from http://www.mfa-cpa.com/Our%20Insights/2015/10/How%20Can%20I%20Measure%20the%20Liquidity%20of%20My%20Nonprofit.aspx 

Te, N. (2018, February 15). Accounting standard helps understand reporting . Retrieved from https://www.nonprofitpro.com/article/improved-FASB-accounting-standard-helps-nonprofits-better-understand-financial-reporting-best-practices/