As part of the FASB’s project to improve on the current financial reporting requirements for not-for-profit entities (NFP), they issued Accounting Standards Update (ASU) 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities in August 2016. This ASU is the first phase of the two-phase FASB project aimed at providing more useful information to donors, grantors, creditors and other users of an NFP’s financial statements, while also reducing the challenges and costs for preparers and users of financial statements.
Below we’ve included some of the main provisions of this new standard.
Classes of Net Assets
- Under the new standard, the three classes of net assets currently presented in the financial statements of NFPs (unrestricted, temporarily restricted, and permanently restricted) will be replaced with two classes of net assets (net assets with donor restrictions and net assets without donor restrictions).
- As there was no real change in the definition of what a donor-imposed restriction is with this ASU, the effect of this change will generally be that temporarily restricted net assets and permanently restricted net assets under current GAAP are combined to become one class called net assets with donor restrictions. Unrestricted net assets under current GAAP will be referred to as net assets without donor restrictions.
- The two classes of net assets will be presented on the face of the statement of financial position along with the currently required amount for total net assets.
- The amount of the change in each of the two classes of net assets will be presented on the statement of activities, along with the currently required amount for the change in total net assets.
- NFPs will continue to be required to disclose the composition of donor restricted net assets at the end of the period, but will also need to disclosure how the restrictions affect the use of resources (i.e. time restricted resources, resources restricted for a specific purpose, etc.).
- Additionally, NFPs will be required to disclose the 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.
- NFPs will still be permitted to choose either the direct or indirect method for reporting operating cash flows. However, when the direct method is used, NFPs will no longer be required to present or disclose the additional indirect reconciliation that current GAAP necessitates.
Enhanced Disclosures on Liquidity and Availability of Resources
NFPs will be required to disclose quantitative and qualitative information on how its liquid resources are managed. Requirements include:
- 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 footnotes as needed, 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) It’s nature
(2) External limits imposed by donors, grantors, laws, and contracts with others
(3) Internal limits imposed by governing board decisions
- All NFPs will be required to present expenses by both their natural classification and their functional classification. Under current GAAP, this is only required for voluntary health and welfare entities. The 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.
- Additionally, NFPs will be required to include a description of the method(s) used to allocate costs among program and support functions.
Underwater Endowment Funds
- Current GAAP requires the deficiencies associated with donor-restricted endowment funds to be presented in unrestricted net assets. Under the new standard, the aggregate losses will be included together with that fund in net assets with donor restrictions.
- NFPs will also be required to disclose each of the following for all underwater endowment funds:
- the NFP’s policies for spending from underwater endowment funds
- any actions taken during the period, concerning appropriation from underwater endowment funds
- the aggregate fair value of such underwater funds
- the aggregate of the original gift amounts (or level required by donor or law) to be maintained.
- Under the new standard, NFPs will report investment return net of external and direct internal investment expenses and will no longer be required to disclose those netted expenses.
Release Restrictions on Capital Assets
- The new standard requires NFPs to use, in the absence of explicit donor conditions, the placed-in-service approach for reporting expirations of restrictions on gifts of long-lived assets, cash or other assets to be used to acquire or construct a long-lived assets, 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.
- This eliminates the current option NFPs have to adopt an accounting policy to release the donor-imposed restrictions over the estimated useful life of the donated asset.
Implementation Date and Considerations
The amendments in this ASU are effective for annual financial statements issued for fiscal years beginning after December 15, 2017, and for interim periods within fiscal years beginning after December 15, 2018. Early adoption is permitted.
The amendments should be applied on a retrospective basis in the initial period of adoption. However, NFPs have the option, if presenting comparative financial statements, to omit certain information required under the ASU for any periods presented before the period of adoption.
You can refer to the full content of FASB ASU 2016-14 (link included below) for further information on the amendments, but please contact us if have any questions on how it applies to your organization or about what steps you should take in preparing for and implementing the new standard.
Nadia Oliveira, CPA specializes in providing audit and assurance services for nonprofit organizations and commercial companies, across a variety of industries. She has experience in providing such services to both public and private companies.