Non-Profit Auditing Standards Updates Affecting This Year’s Audit

Happy New Year!  I’m sure most of you are in full swing with closing your books and getting all your ducks in a row.  Here at the office, we’re in full prep mode for “opportunity season” aka “busy season”.  There’s a few things you should know about as you close out your books and begin prepping for your audit this year.  I’d like to think of this as the cliff note version of our roundtable presentation in late November of the auditing standards update that will affect you for periods ending on or after 12/15/18, so NOW.  There’s a lot of info below, but hopefully this isn’t the first time you’ve heard of these changes and remember, we’re here to help guide you.  With any luck, you may not have too many changes/things to do and perhaps some changes are not applicable to your organization.

• Going Concern
  • Responsibility is on management to evaluate this
  • Time period to evaluate –  is 1 year from the issuance of the financial statements, not 1 year from year end
  • What you need to do – evaluate your financial position as to whether or you’ll be able to continue operating for 1 year from the date of your audit report

• Net Asset Classes
  • Previously – unrestricted, temporarily restricted, permanently restricted
  • Now – without donor restriction or with donor restriction
  • All organizations must have a policy in place regarding board designated net assets even if no designations currently exist. This policy should include information on the process required for the board to designate net assets, such as it requires a majority vote of the board or this authority is delegated to management, as well as how to un-designate those net assets.
  • What you need to do – draft a policy in regards to how the board designates net assets and how they get undesignated.  Or you could even have a “we do not allow board designations” policy if that’s applicable.

• Liquidity and Availability Disclosures
  • There will be new footnote disclosures
  • Qualitative
    • Will be a narrative form footnote disclosure on how you are managing resources for the next year.  Things to include would be management’s goal of days of expenses to have on hand, what does management do with any excess cash (example:  maintain $5k in the checking account and invest the rest in CDs) and any information on other sources of cash that may be available to management if unexpected cash needs arise (open line of credit)
  • Quantitative
    • May be a narrative form or table form footnote disclosure specifically stating what do you have today to pay for the next year
  • What you need to do – take a look at what you have for current assets vs current liabilities as of year-end.  If you’ve got contractual or donor-imposed restrictions (restrictions on cash, endowment funds, other) it’s going to change the formula a bit or if you have board designations.  If you don’t have more current assets than current liabilities, you’re going to be showing a negative number in the footnotes. You may also want an internal policy on how the organization manages its resources.

• Expenses
  • If you didn’t have a statement of functional expenses before, you’ll need one now.  Expenses need to be shown by their functional and natural class.
    • Functional – program, management and general, fundraising.
    • Natural – wages, rent, supplies, etc.
    • There’ll be a new footnote disclosure will need to describe how you allocate expenses
      • Example: the expenses that are allocated include occupancy, depreciation, and amortization, which are allocated on a square footage basis, as well as salaries and wages, benefits, payroll taxes, professional services, office expenses, information technology, interest, insurance, and other, which are allocated on the basis of estimates of time and effort.
    • There’s improved guidance about what expenses are management and general.  Here’s some expenses are that are 100% management and general:
      • Oversight and business management
      • General record keeping and payroll processing
      • HR functions
      • Budgeting
      • Interest expense on debt
      • Soliciting funds other than contributions and membership dues
      • Writing grants
        • Note: it’s fundraising if you’re soliciting people for funds vs applying for grants
      • Grant reporting
    • What you need to do – make sure you know what expenses you’re allocating and on what basis.  Then draft a policy like the example above.
  • Statement of Cash Flows
    • You can continue to use either direct or indirect method
    • If you use the direct method, you no longer are required to show the indirect reconciliation
    • What you need to do – likely nothing!  Wegner uses the indirect method and we generally prepare the financial statements as a non-attest service with your audit.
  • Investment Return
    • Reported net of both external and direct internal investment expenses
    • You do not need to disclose the investment expense that has been netted
    • No longer need to disclose components of investment return
    • Investment expenses netted should be excluded from the analysis of expenses by functional and natural classifications
    • What you need to do – determine if external and internal investment expenses are material and if so net your investment expenses with your investment return.