What Nonprofit Executives, Professionals, Donors, and Accountants Need to Know About Tech Standard Changes
The Financial Accounting Standards Board (FASB) recently amended its standards to make it easier to account for costs associated with cloud-computing services. Although the changes appear to be minor, they will allow your company more options when investing in technological infrastructure.
These changes should be noted if you are a nonprofit CEO, a funder, or work in IT or finance.
What you need to know is as follows:
The Backstory
Through the Tech for Common Good initiative, Independent Sector and TechSoup collaborated in April 2017 to submit recommendations to FASB. This nonprofit organization sets financial accounting and reporting standards for public, private, and nonprofit entities that follow Generally Accepted Accounting Principles. Prior to these guidelines, the accounting standards for cloud-computing services were complicated and difficult to comprehend. The working group recognized that a lack of transparency was one aspect contributing to under investment in cloud computing .
The ability of charitable organizations to plan strategically depends on having more explicit guidelines surrounding how to account for investment in preparing for and migrating to cloud services.
The new guidelines allow organizations to spread the cost of cloud-computing installation across the estimated life of the cloud-computing arrangements (CCA) rather than incurring a high operating charge in the first year.
What Nonprofit Executives and Accountants Need to Know
These changes eliminate the need for organizations to record a large operating expense for the costs of shifting to the cloud in the year they incur them. Instead, what was once a hefty one-time “overhead expense” can now be spread out over several years.
Under the prior guidelines, one-time installation costs were all classified as overhead expenses, preventing organizations from adopting technology and causing them to underinvest in critical infrastructure.
Despite the lack of evidence that higher overhead costs harm nonprofit operations or outcomes, foundations and individual contributors frequently impose strict overhead spending limits on grants and contributions or use subjective overhead ratios as a significant ranking factor. As a result, businesses had to choose between investing in IT infrastructure and lowering their annual overhead rate. In cases when grant donors impose severe overhead constraints on the use of grant monies, organizations have had their technological strategy decisions taken away from them.
Finally, the new standards give users of nonprofit financial statements more useful and consistent information. The old standards made it difficult for users to fully comprehend nonprofit operations because some organizations’ high implementation costs appeared on income statements in a single year. In contrast, other organizations’ costs were allocated over a period of years due to language in an agreement or technical differences in the delivery of a service (but not the organization’s use of a service). The new standards bring all forms of software into line, guaranteeing that total expenditures are spread out across the system’s expected lifetime.
What Nonprofit Professionals Need to Know
Understanding that qualifying cloud-computing arrangements might be spread out over a longer time will help you make better tech decisions for your company. Now is the moment for your leadership, finance, and IT teams to collaborate closely to see how this change will affect spending (including current expenses), budgeting, and even how you apply for grant funding. This is an excellent opportunity to integrate technology expenditures with business goals and to “dream big” without risking your bank sheet. It’s also a perfect chance to actively involve donors in discussions about strategically expanding your IT infrastructure.
What Funders Need to Know
Technology is becoming a more significant part of how the social sector makes an impact, and organizations without it can be inefficient or, in the worst-case scenario, put donors, funders, and communities at risk. As a result, the Tech for Common Good collaborators believes that, from an accounting approach, it makes sense to value organizational technology investment in a way that reflects its strategic importance. As a result, the new guidelines give businesses a lot more leeway regarding technology spending. Moreover, donors are not dissuaded from sponsoring technology ventures in the first place.
Funders should actively encourage grantees to use technology and data to maximize their programmatic work and operations. A successful tech strategy allows organizations to focus more of their staff time executing against goals.
Learn more by attending the May 23 Sunshine Certificate in Nonprofit Management class on Accounting for Time & Money class on Monday, May 23, 2022 from 5:30 to 9:00 pm
Source: Matt Perdoni – https://independentsector.org/news-post/nonprofit-tech-accounting-standards-have-changed-why-should-you-care/
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