In August 2016, the Financial Accounting Standards Board released Accounting Standards Update (ASU) 2016-14 Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities. The new update streamlines and simplifies requirements related to several aspects of financial reporting to improve consistency among not-for-profit organizations. Among other changes the following areas draw additional attention: reporting and allocation of expenses, classification of net assets and reporting of board-designated assets.
Reporting and allocation of expenses. The new guidance will require analysis of expenses by function and nature to be presented in one location in the financial statements, whether in the notes or in a separate financial statement. This requirement will apply to all nonprofit organizations, not only to voluntary health and welfare organizations, as stated in existing guidance. In addition, a qualitative description of the methods used to allocate expenses among programs and support functions will be included in the notes to financial statements.
Classification of net assets. New classification structure added two categories: “With Donor Restrictions” and “Without Donor Restrictions.” The with donor restrictions category includes what was previously reported as “Permanently Restricted” and “Temporarily Restricted.” Net assets without donor restrictions include those that are designated by the board, and those previously reported as “Unrestricted.” The change in classification to net assets with donor restrictions does not eliminate current requirements to disclose the nature and amounts of different types of donor-imposed restrictions. The day-to-day accounting treatment for net assets, however, is unchanged, as are the laws surrounding the use and protection of the assets.
Reporting of board-designated assets. The new standard will require disclosure about the amounts and purpose of board designations of net assets. Any governing board actions that results in self-imposed limits on the use of resources will also be disclosed in the notes to the financial statements.
Other provisions include the following:
- Enhanced disclosures for underwater endowments, including disclosure of policies for reducing or ceasing spending from such endowments.
- The placed-in-service approach will be required for determining when restrictions are met for all capital gifts, eliminating the over-time option for expiration of capital restrictions
- Additional disclosures will be required to communicate information useful in assessing liquidity within one year of the balance sheet date. These additional disclosures will include both qualitative and quantitative information.
- The indirect or direct method of presenting the statement of cash flows will be allowed. However, the reconciliation of operating items no longer will be required when using the direct method.
- Investment return will be reported net of external and direct internal investment expenses and disclosure of those netted expenses will no longer be required.
ASU 2016-14 is effective for annual financial statements for fiscal years beginning after December 15, 2017, and for interim periods within fiscal years beginning after December 15, 2018, with early adoption permitted. Organizations presenting comparative financial statements must apply the requirements of this ASU retrospectively.
Although these changes will require significant effort on the part of nonprofit organizations, the FASB’s goal is to improve the financial reporting to ensure that users of their financial statement received the most accurate picture of how the nonprofit organizations are doing fiscally. bgr CPAs employs a team of accounting experts who can navigate nonprofit organizations through challenges in applying new standards and reporting them accurately.