The new FASB rules have re-defined the classification of funds known as net assets, altering the way nonprofits present their financial statements.
New FASB Rules Change Nonprofit Fund Classifications
The job of most accountants is to monitor revenue and expenses to maximize the profits through financial planning and management. But, for accountants that are responsible for managing nonprofits, this is not their main responsibility.
Nonprofit organizations that receive revenue through public and private sources of funding use the system of fund accounting rather than traditional business methods of accounting. Fund accounting refers to the management and allocation of revenue received by nonprofits and the restrictions, or designations that are placed on those sources of revenue.
The basic idea behind fund accounting is to monitor and document the use of assets that are donated by outside parties. In many cases, donations made to nonprofits must be used to pay for a specific project or purpose. Accountants involved in fund accounting keep track of the restrictions that are placed on each revenue source to ensure the funds are used properly.
The new FASB rules for nonprofit financial statement presentation define two classes of funds or net assets:
- Unrestricted – Revenue that is received with no strings attached and can be used at the discretion of the organization’s management.
- With Donor Designations – Revenue that is received that is designated for a specific purpose and can only be used for that purpose.
Donor Designations Combine Two Asset Classes
With Donor Designations combines the two restricted net asset classes in previous financial statement presentations – Temporarily Restricted and Permanently Restricted.
Nonprofits must use fund accounting because of the following:
- Transparency – By keeping each fund separate under specific categories, the inflow of revenue and resources can be categorized appropriately. Using fund accounting methods will also show how the funds designated for a specific project are used.
- Compliance – Nonprofits enjoy special privileges in the form of tax breaks and other government concessions, but they can only continue to benefit as long as they remain compliant. They must abide by the rules stipulated in forming their organizations; otherwise, such privileges will be removed.
- Sustainability – Applying fund accounting principles provides systematic method that shows whether a nonprofit can fulfill their mission with the resources available. By identifying the revenue coming in and immediately investing it towards the fund it was earmarked for, it’s easier to track whether or not, they can maintain a sustainable business.
The emphasis of fund accounting is not efficiency and performance, but accountability and the sources and uses of funds.
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