Accounting Standards Update for the Presentation of Financial Statements of Not-for-Profit Entities
In August 2016 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-14 that will have a major effect on the way Not-for-Profit Entities (NFPs) present their financial statements. This ASU aims to provide better information to donors, creditors, and other users of NFP financial statements. Areas of NFP financial reporting most affected by this ASU are the net asset classifications and information related to an NFP’s liquidity, financial performance, and cash flows. This will be effective for your (either December 31, 2018 or June 30, 2019) year end financial statement. Below are highlights from this ASU.
The current classification options for net assets (unrestricted, temporarily restricted, and permanently restricted) will be reduced to two options: “net assets with donor restrictions” and “net assets without donor restrictions”. The FASB states this will reduce the difficulty in understanding an entity’s asset structure, especially in regards to liquidity measures.
- Continue to present on the face of the statement of cash flows the net amount for operating cash flows using either the direct or indirect method of reporting but no longer require the presentation or disclosure of the indirect method (reconciliation) if using the direct method.
- Report investment return net of external and direct internal investment expenses and no longer require disclosure of those netted expenses.
- Use, in the absence of explicit donor stipulations, the placed-in-service approach for reporting expirations of restrictions on gifts of cash or other assets to be used to acquire or construct a long-lived asset and reclassify any amounts from net assets with donor restrictions to net assets without donor restrictions for such long-lived assets that have been placed in service as of the beginning of the period of adoption (thus eliminating the current option to release the donor-imposed restriction over the estimated useful life of the acquired asset).
- NFPs can also expect to enhance their disclosures on various aspects of their business.
- Amounts and purposes of governing board designations, appropriations, and similar actions that result in self-imposed limits on the use of resources without donor-imposed restrictions as of the end of the period.
- Composition of net assets with donor restrictions at the end of the period and how the restrictions affect the use of resources.
- Qualitative information that communicates how an NFP manages its liquid resources available to meet cash needs for general expenditures within one year of the balance sheet date.
- Quantitative information, either on the face of the balance sheet or in the notes, and additional qualitative information in the notes as necessary, that communicates the availability of an NFP’s financial assets at the balance sheet date to meet cash needs for general expenditures within one year of the balance sheet date. Availability of a financial asset may be affected by (1) its nature, (2) external limits imposed by donors, grantors, laws, and contracts with others, and (3) internal limits imposed by governing board decisions.
- Amounts of expenses by both their natural classification and their functional classification. That analysis of expenses is to be provided in one location, which could be on the face of the statement of activities, as a separate statement, or in notes to financial statements.
- Method(s) used to allocate costs among program and support functions.
- Underwater endowment funds, which include required disclosures of (1) an NFP’s policy, and any actions taken during the period, concerning appropriation from underwater endowment funds, (2) the aggregate fair value of such funds, (3) the aggregate of the original gift amounts (or level required by donor or law) to be maintained, and (4) the aggregate amount by which funds are underwater (deficiencies), which are to be classified as part of net assets with donor restrictions.
A second phase of the project is expected to address more protracted issues surrounding operating measures. Delaying changes to operating measure reporting will allow the FASB to coordinate its Phase 2 considerations for NFPs with related research activities on financial performance reporting by business entities.