Are you ready for significant changes to the financial statements of not-for-profit organizations?
On August 18, 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-14 Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities. ASU 2016-14 requires a number of changes to the financial statements of not-for-profit organizations (NFPs). This article provides an overview of those key changes.
Why Make Changes?
ASU 2016-14 is the result of a multi-year FASB project conducted to review the current financial reporting model for NFPs that has been in place for approximately 20 years. As a result of the review, the FASB identified several areas of the financial reporting model that needed improvements or updates to provide better information to those who rely on the financial statements issued by NFPs.
The FASB has indicated that it does not intend ASU 2016-14 to be a complete overhaul of the current financial reporting model for NFPs contained in generally accepted accounting principles (GAAP). The current financial reporting model in GAAP is fundamentally sound, so the goal of ASU 2016-14 is to improve how NFPs communicate their financial performance and condition, while also reducing certain costs and complexities in preparing financial statements.
More specifically, the FASB noted it heard concerns about the following areas that need improvement:
- Complexities around the three required classes of net assets.
- Difficulties in understanding some NFPs’ liquidity.
- Inconsistencies in the information NFPs provide about expenses and investment returns, and
- Limited usefulness of the statement of cash flows, particularly regarding the reporting of operating cash flows.
What Specifically is Changing?
ASU 2016-14 requires eight key changes to financial reporting for NFPs:
1. Net assets will now be reported in two classes (net assets with donor restrictions and net assets without donor restrictions).
2. NFPs will be required to disclose board-designations on net assets.
3. Additional disclosures will be required for “underwater” endowment funds.
4. NFPs will no longer be allowed to imply a time restriction on donations of, or contributions restricted for the purchase of, property and equipment.
5. All NFPs must present a statement of functional expense or include a similar matrix-type disclosure in the footnotes and also disclose the methods used to allocate costs to the different functional categories.
6. Investment expenses will be required to be presented net with investment return in the statement of activities and NFPs will no longer be required to disclose the amount of investment expenses.
7. NFPs that elect to use the direct method of presenting operating cash flows are no longer required to present the indirect reconciliation.
8. New required qualitative disclosures regarding how a NFP manages its liquidity and required quantitative disclosures that communicate the available financial assets to meet cash needs for general expenditures within one year of the balance sheet date.
When Are These Changes Effective?
ASU 2016-14is effective for fiscal years ending in or after December 2018. Early implementation is allowed.
Want to Learn More?
This article highlights the key changes required by ASU 2016-14. In future articles we will discuss each of the key changes in more detail along with practical guidance on implementation issues. In the meantime, please contact your Clark Nuber service team or Andrew Prather if you would like to discuss how these changes will impact your NFP’s financial statements.
© Clark Nuber PS and Developing News, 2016. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Clark Nuber PS and Developing News with appropriate and specific direction to the original content.