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FASB Changes in Nonprofit Reporting Now a Reality

FASB Changes in Nonprofit Reporting Now a Reality

Oct 11, 2016

After years of speculation and debate, the largest scale change in not-for-profit financial reporting since 1993 was issued on August 18, 2016 by the Financial Accounting Standards Board (FASB). Accounting Standards Update (ASU) 2016-14, Presentation of Financial Statements for Not-For-Profit Entities is the culmination of a six-year project designed to overhaul what many believe is an overly complex and limited not-for-profit reporting model. The ASU is effective for fiscal years beginning after December 15, 2017 with early adoption permitted.

The update aims to improve how a nonprofit organization classifies its net assets and provides information in its financial statements and notes about its financial performance, cash flow and liquidity. These changes are considered phase 1 of a 2 phase process. FASB will continue to work on phase 2 of the project, which may include requiring nonprofits to provide an operating measure of their financial performance.

Changes created by the ASU include the following:

    • Net Asset Classification: The three classes of net assets: unrestricted, temporarily restricted, and permanently restricted, will be reduced to two classes: net assets with donor restriction and net assets without donor restrictions.
    • Board-Designated Net Assets: The amounts and purposes of board designated net assets must be disclosed.
    • Expenses: Expenses are required to be disclosed by both their natural classification and their function. This can be presented in the footnotes to the financial statements or in a statement of functional expenses.
    • Statement of Cash Flows: If a direct method cash flow statement is presented, it will no longer be mandatory to present the indirect method reconciliation. 
    • Investment Return: Investment return is required to be presented net of external and internal investment expenses. Disclosure of the expenses netted against investment return will no longer be required. 
    • Liquidity Information: Additional disclosures providing qualitative and quantitative information on the availability of an organization’s financial assets and how the organization will manage its liquid resources available to meet cash needs. 
    • Underwater Endowments: Underwater endowments will now be reported as a reduction to net assets with donor restrictions with mandatory disclosures of policies, fair value, original gift amounts, and the underwater status. 
    • Gifts of Long-Lived Assets: Organizations who receive gifts of cash or assets to be used to acquire or construct a long-lived asset will be required to release donor-imposed restrictions when the asset in placed-in-service absence of donor restrictions to the contrary.

This ASU will have a significant impact on nearly all nonprofit organizations and their financial statement users. These organizations should have a thorough understanding of the changes and how they will affect their financial reporting. We encourage organizations to begin preparing now.

Mark Steinberg, CPA, CVA

Mark Steinberg, CPA, CVA

Mr. Steinberg's expertise is primarily in the areas of assurance services, business valuation, litigation support, and third party reimbursement. He has extensive knowledge of the health care industry and nonprofits.
Mark Steinberg, CPA, CVA

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