Nonprofit organizations and their accountants may want to adopt Financial Accounting Standards Board’s new standard for not-for-profits early before they have to begin adjusting to some of the other new standards coming out from FASB.

Last week, FASB released the long-awaited accounting standards update, which will change how nonprofits classify their net assets and provide information in their financial statements and notes about their financial performance, cash flow and liquidity (see FASB Releases Not-for-Profit Accounting Standard).

“I believe it’s a really good move forward,” said Lee Klumpp, director in BDO USA’s Nonprofit Institute for Excellence. “It makes improvements in areas where it was needed, such as net asset classes. It allows some flexibility and alternatives for nonprofits to explore other ways of presenting and communicating their financial results and operations.”

While the new standard makes a number of important changes, FASB decided to put off some of the proposals in the exposure draft it released last year after receiving feedback that several of the ideas were getting ahead of changes in accounting for for-profit businesses. Instead, it will continue to work on a phase 2 of the project, which may include requiring nonprofits to provide an operating measure of their financial performance.

“It will give them additional data in order to do research,” said Klumpp. “For instance, with the intermediate operating measure, they can now look much more closely at what people are doing, and seeing what could be done to better define the operating measure and decide whether or not to require it.”

As a former member of the FASB Industry Fellowship Program, Klumpp helped lay the groundwork for the original proposal. “When I was involved in the initial research, there were a lot of organizations that used an operating measure, but they didn’t call it that,” he said. “Whether they knew they were using an operating measure or not was questionable, but it was obvious they were breaking out operating from non-operating by looking at the statement. This will give them more information.”

In phase 2, FASB may decide to include more guidance for specific kinds of nonprofits. Last year’s exposure draft included guidance geared toward health care not-for-profits, but much of that wasn’t part of the standard released last week.

“Now that the FASB is looking at other ways that are more generally GAAP for for-profits on how to improve their financial statements, there may be some things that come out that are foundational building blocks for the statements that may need to change for a nonprofit in health care,” said Klumpp. “For instance they were doing something in the nonprofit standard which got the for-profits’ attention, where they were reclassifying interest expense and interest income, along with assets that were acquired with contributions, and they were reclassifying them on the statement of cash flows. The for-profit world was a little concerned about that as well as the concern to require the direct cash flow method.”

FASB has other projects where it is looking at the statement of cash flows and financial reporting for for-profits, and the work on the not-for-profit standard could make its way into the for-profit standards where it makes sense.

“I think the board will go down the path of looking at some of the phase 2 stuff in order to see if they can go any further with that, but they’re going to do it in conjunction with the for-profits as well, which makes sense,” said Klumpp. “The board of directors of the nonprofits generally has their background financially in the for-profit world. Although there are things that are unique to not-for-profits such as contributions and net assets, the foundations of the statements should be fairly similar. If I’m reading a balance sheet for a for-profit or a nonprofit, the same fundamental guidelines should be there. If you change the foundation or the building blocks, it makes it more difficult for people to understand.”

He believes FASB has taken the right direction. “They’ve heard what the stakeholders have to say, and I think what they have come up with is an improvement,” said Klumpp. “They were able to get a project done and out, and then they’re going to do the pieces that needed a bit more in-depth thought and research. I think they have accomplished what they set out to accomplish.”

He does not anticipate the changes will be terribly expensive for most nonprofits. “The standard does not require any change in the recognition or measurement of any transaction that a nonprofit currently has,” said Klumpp. “They don’t have to change their general ledgers or accounting systems, their processes, policies or procedures. This is really about the financial presentation.”

In the first year, the nonprofit’s management, especially in the finance and accounting group, will need to spend some time understanding the new requirements and how information needs to be presented. “I think the best practice will be to do a mockup of their most recently issued GAAP financial statements that have been issued under the new requirements and present that to other members of their management team and the board to get their feedback,” Klumpp suggested. “Overall the investment in the initial year may be significant time, but not a lot. In subsequent years that investment should be minimal.”

The nonprofit’s outside auditors will need to have a conversation with those charged with governance, typically the audit committee and possibly the full board, Klumpp recommended. “There’s a little bit of time before the standard goes into place,” he said. “A lot of auditors are starting to wrap up their June 30 clients. In those meetings where they’re going to present the financial statements to clients, they should be discussing, at least at a high level, some of the new requirements.”

He suggests nonprofits and their accountants come up with a plan for implementing the changes. They should first read FASB’s summary of the standard in its FASB in Focus and gain an understanding of what it is before delving into the full accounting standards update. “Sit down with the financial statements and see what parts of the financial statements may be affected, and then go into the standard and start looking at the illustrative examples, taking stock of what those are to see how best they can communicate the intent of the new standards,” said Klumpp. “Have a discussion with management and the audit committee and board of directors. And get consensus from the auditors before their audit ever starts on the year when they want to implement.”

Communicating about the changes and educating clients will be important before the standard takes effect. The changes in the standard are effective for annual financial statements issued for fiscal years beginning after Dec. 15, 2017, and for interim periods within fiscal years beginning after Dec. 15, 2018.

FASB is allowing application of the amendments to interim financial statements but they are not required in the first year of applying the new standard. Early application of the amendments in the accounting standards update is also allowed.

Klumpp recommends early adoption if possible since other important new FASB standards for revenue recognition and leasing are also going to be taking effect in the next few years. “I would caution nonprofits that there’s going to be three years one right after another where it’s the not-for-profit standard, the lease standard and the rev rec standard, so I would look at situations where you can adopt early if that would be beneficial to your organization,” he said. “I call them the ‘trifecta of standards.’ Look at how they are going to affect your organization. You can only early adopt two. For some organizations the rev rec and leasing standards are going to be considerable work. For others, they may not be so much work. I think it’s on an organization by organization basis. The new standard is great, but you’ve got a lot that’s coming down the pike in the near future, and you may want to consider how to best implement those changes.”