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.