In late August, the Financial Accounting Standards Board (FASB) issued updated standards to streamline the accounting for costs related to certain cloud computing services. While seemingly minor, the changes will give your organization more flexibility when it comes to investing in technology infrastructure.
If you are a nonprofit executive, a funder, or work in IT or finance, you should take note of these changes. Here’s what you need to know:
The Backstory
In April 2017, Independent Sector and TechSoup partnered through the Tech for Common Good initiative to submit recommendations to FASB, a nonprofit organization that establishes financial accounting and reporting standards for public, private, and nonprofit entities following Generally Accepted Accounting Principles. Before these recommendations, the rules around accounting for cloud computing services were complex and hard to understand. It was apparent to the working group that lack of clarity was one factor contributing to underinvestment in cloud computing. Having clearer rules around how to account for investment in preparing for and migrating to cloud services is key to nonprofit organizations’ ability to plan strategically.
The new standards allow nonprofits to pay for implementation costs associated with cloud computing across the expected life of the cloud computing arrangements (CCA), rather than posting a large operating expense in the year of implementation.
What Nonprofit Executives and Accountants Need to Know
Most importantly, these updates mean that nonprofits are no longer required to post a large operating expense for the costs of moving to the cloud in the year incurred. Instead, what previously was a large single-year “overhead expense” can now be spread over a period of years.
The often-large one-time implementation costs all counted as overhead expenses under the previous rules, which hindered technology adoption by nonprofits and caused organizations to under-invest in essential infrastructure. Although there is little evidence that higher overhead expenses negatively influence nonprofit operations or outcomes, foundations and individual donors sometimes apply rigid limits on overhead spending to grants and contributions or use subjective overhead ratios as a key ranking mechanism. Consequently, organizations were left to choose between investment in technology infrastructure or minimizing their annual overhead rate. And in instances where funders place strict overhead limits on the use of grant funds, nonprofits essentially had those decisions about technology strategy made for them.
Ultimately, the new standards provide more meaningful, consistent information to the users of nonprofit financial statements. The old standards made it difficult for users to fully understand nonprofits’ operations, because for some organizations large implementation costs appeared on income statements in a single year, whereas for other organizations the language in an agreement or technical differences in the delivery of a service (but not the organization’s use of a service) resulted in costs being allocated over a period of years. The new standards align all types of software, ensuring that the total costs are spread across the estimated life of the system.
What Nonprofit Professionals Need to Know
Understanding that the cost of eligible cloud computing arrangements can be spread over a longer period can help you make better tech decisions for your organization. Now is the time for your leadership, finance, and IT teams to work closely together to determine how this change might impact spending (including expenses already incurred), budgeting, and even the way you apply for grant funding. This is a great opportunity to align investments in technology with strategic objectives, and to “think big” without fear of blowing up your balance sheet. It’s also a great opportunity to actively engage funders about strategically building out your technology infrastructure.
What Funders Need to Know
Technology is an increasingly important part of how the social sector delivers impact, and organizations without requisite capacity can simply be inefficient, or in the worst cases, put donors, funders, and communities at risk. Accordingly, it was the view of the Tech for Common Good collaborators that from an accounting standpoint it makes sense to treat organizational investment in technology in a manner consistent with its strategic importance. The updated rules give organizations much greater freedom to spend on tech. Just as important, funders are not disincentivized from supporting tech projects in the first place. A good tech strategy enables organizations to focus more of their staff time on executing against mission, and funders should be actively encouraging grantees to leverage technology and data to maximize their programmatic work and overall operations.
Learn more about the updated rule on the FASB website.
