If You Can’t Use “Funds,” Can You Still Use “Fund ”?

Nonprofits are grappling with drastic changes in their accounting methods. What do these changes mean for you?

reporting flexibility needed to present information to many internal and exter- I’ve heard that new rules require nonprofit organizations nal requesters in a variety of formats. to revise the way they for contributions and pre- Fund accounting software also lets you sent their financial statements. As I understand it, one of allocate easily across funds or these changes is that the word “fund” is no longer used in fund groupings. (See the list of fund nonprofit financial statements. Q: accounting functionality on page 9). Does this mean that nonprofits no longer need to use “fund accounting”? Do How Do SFAS 116 & 117 we still need to track individual funding sources in our books, or should we Affect Nonprofit Accounting? commingle them? Should we continue using fund accounting software? I’m confused! Please help. When the Standards Board (FASB) introduced SFAS 116 and 117, it was the first time You aren’t the only accounting methods. In fund account- FASB issued statements about how non- one confused by the ing, you allocate money into separate organizations should account for new rules. Many non- balancing sets of books and handle them contributions and how they should pre- profits are asking simi- according to donor restrictions. In fund sent these contributions in their finan- A:lar questions about the cial statements. SFAS 116 defines how changes, which are explained in nonprofits should report donations, Statement of Financial Accounting Q&A including pledges, donations of services, Standards (SFAS) Numbers 116 and 117. works of art, and so on. SFAS 117 fur- These rules affect nonprofits’ financial ther clarifies how nonprofits should statements for fiscal years beginning report contribution information in their after December 15, 1994, except for With the extra demands financial statements. organizations with less than $5 million of SFAS 116 and 117, The intent of SFAS 116 and 117 is to in total and less than $1 million in a good fund accounting enhance the relevance, understandabili- annual expenses. For those smaller non- ty, and comparability of nonprofits’ profits, the rules affect financial state- system is more financial statements. These reports are ments for fiscal years beginning after imperative than ever. primarily used by donors, members, December 15, 1995. creditors, and others who provide First, let’s discuss what fund resources to nonprofits. By having stan- accounting is. Then we’ll answer your dardized financial statements, these questions about whether you can still resource providers can make better use fund accounting—and the extra accounting, you also produce financial assessments about how well a nonprofit demands that SFAS 116 and 117 put on statements and reports by fund, or by is performing. your accounting system. grouping funds together. Many nonprof- You’re right to point out that the its use funds to segregate money accord- What Is Fund Accounting? word “fund” is no longer used in non- ing to its source, so that their “funds” profit financial statements. That’s The need for nonprofits to be more are essentially the same as “funding because the focus of SFAS 117 financial accountable to their donors led to the sources.” statement reporting is now on “net accounting style called “fund account- Besides detailed tracking, fund ” classification, rather than on tra- ing” to differentiate it from commercial accounting software provides the ditional “funds.” The new net asset Nonprofit World, Vol. 15, No. 1

8 classes combine contributions accord- expenses for programs, fundraising, So, SFAS 117 does not eliminate the ing to donor–imposed restrictions. Thus, and so on. (In addition, voluntary reason for nonprofits to track and report there are three net asset classes: unre- health and welfare organizations by fund. You will likely need to track stricted, temporarily restricted, and per- must provide a separate statement funds internally to ensure that monies manently restricted. which details expenses, in a grid, received from a variety of sources are Other significant SFAS 116 and 117 showing natural classification by not commingled, while, for external pur- changes are as follows: function. A separate statement of poses, you need the net asset classifica- functional expenses • You must now provide three finan- by natural classifica- cial statements: tion is optional, but WHAT’S THE DIFFERENCE 1. Statement of Financial Position encouraged, for all (new name for ). nonprofits.) BETWEEN COMMERCIAL & 2. Statement of Activities (essen- FUND ACCOUNTING SYSTEMS? Do You Still Need tially a combined Statement of Commercial companies have accounting sys- and Expenditures by to Track and Report tems that measure performance primarily by profit function, with a few differ- Using Funds? and loss. Since nonprofits have different purposes, ences). This statement does not SFAS 117 does not goals, and accountability from for–profits, their preclude providing disaggregat- prevent nonprofits from accounting systems must reflect those differences. ed information by fund groups. issuing financial state- For example, nonprofits’ accounting systems must 3. Statement of Flows. ments in whatever format do the following: they need. This means it’s Keep a formal as part of the organiza- fine for you to continue 1. tion’s books. (It may also be a legal using funds if it helps document.) Q&A your contributors track Track and report accounting records sepa- how their money is being rately for different funding sources, grants, spent, or if it helps your 2. departments, programs, and/or functions Most nonprofits will departments track whose (and be able to allocate expenses across need to comply with money is being applied to these groupings). SFAS 117 to receive a programs and how much of it remains. Track and report across different time peri- “clean” opinion from SFAS 117 does not 3. ods (frequently not an annual basis), which their auditor. mandate the way you cre- often span multiple fiscal years. ate other kinds of reports Keep funds separately, according to donor or (though there 4. restrictions. is an optional SFAS 117 Measure the success of programs and budget format available). • You must record pledges (now 5. fundraising events. called “promises to give”), in total, Nor does it dictate the Track the ratio of overhead to program when the donor makes the pledge. specific reports that fund- ing sources or donors 6. usage. • You must record the entire amount of may require. Funding Track encumbrances. a multiple–year contribution or pledge sources and donors can 7. Produce specialized reports for different in the year you first received it. ask for SFAS 117–compli- internal and external audiences, including the ant statements and/or 8. • Barring specific donor or legal Financial or financial statements for- restrictions, you must report Standards Boards (FASB and GASB). matted by fund as well as income from permanently restrict- their own unique report ed assets (that is, endowments) as Once nonprofits reach a certain size and have formats. Most nonprofits unrestricted income, separately more than one funding source, they find that com- will also need to comply from permanently restricted assets. mercial accounting software will not meet these spe- with SFAS 117 to receive cial tracking and reporting requirements. That’s why • You must show expenses by func- a “clean” opinion from fund accounting software was invented.

tion in total—for example, total their auditor. January • February 1997

9 tions required by SFAS 117. Tracking by • Yes, one of the changes is that your fund will let you create internal reports Q&A financial statements will no longer on how much of a particular funding contain the word “fund.” source remains unspent versus a budget- • No, this doesn’t mean that you ed amount. It will also let you see how If you find yourself should give up fund accounting or much money a particular program used using lots of spread- fund accounting software. Rather, from a variety of funding sources. Alter- sheets, that’s a clue that with SFAS 116 and 117 you have natively, if you don’t need to track funds additional requirements. You will for internal or external purposes, you you’re using an inade- probably still want to track individ- don’t have to use fund classifications. quate commercial ual funding sources in your books accounting system. If You Don’t Track Funds, Do rather than commingle them. Even You Still Need Fund if you don’t, you’ll find fund Accounting Software? accounting software helpful for all accounting system designed for your your unique accounting needs. With Since tracking and reporting by needs. Nonprofits often use spread- the extra demands of SFAS 116 and funds are only a small part of nonprofit sheets to try to compensate for commer- 117, a good fund accounting system accounting requirements, and SFAS 117 cial software’s missing functionality. is more imperative than ever. focuses only on the financial statements However, spreadsheets are time–con- Alesa Locklear, CPA, Vice President of nonprofits, there are many other suming, introduce inaccuracies, and are Micro Information Products (MIP) things to keep in mind. For example, see more confusing than enlightening for 505 East Huntland Drive, Suite 340 the list of eight things a nonprofit nonprofits. Custom modifications or Austin, Texas 78752–3772 accounting system must be able to do Phone: 512–454–5004 or overlays to commercial software pose (page 9). Fund accounting software 800–647–3863 high up–front and are very expen- helps nonprofits meet these eight Fax: 512–454–1246 sive to maintain year after year. Thus, accounting needs in ways that commer- like most nonprofits, you will probably Also see the article “Are You Ready cial accounting software cannot. for the New Accounting Rules?” in Even if you don’t have to track find that the only efficient way to fulfill Nonprofit World, January–February funds, you’ll find it difficult to perform your accounting requirements is with fund accounting software, because it is 1994, and the informative free booklet, these eight tasks without software “A Guide to Purchasing Accounting developed specifically for your unique designed for nonprofits. Nonprofits find Software for Nonprofit Organizations tracking and reporting needs. that trying to use commercial account- and Governmental Agencies” distrib- ing systems to perform these unique uted by Micro Information Products nonprofit accounting functions is What’s the Final Answer? (see above address, phone, and fax impractical, difficult, and expensive. To answer your questions, then: numbers). MIP has designed Windows If you find yourself using lots of and DOS fund accounting software for spreadsheets, that’s a clue that you’re • Yes, the new rules drastically nonprofits’ unique needs since 1982 using an inadequate commercial change the way you need to pre- and has over 3,300 customers world- accounting system rather than a fund pare your financial statements. wide. Nonprofit World, Vol. 15, No. 1

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