Major changes to not-for-profit organizations’ financial statement presentation were recently finalized with the issuance of the Financial Accounting Standards Board (FASB)’s Accounting Standards Update (ASU) No. 2016-14, Not-for-Profit Entities (Topic 958) Presentation of Financial Statements of Not-for-Profit Entities.
Designed to enhance and clarify the information provided in a not-for-profit’s financial statements, the accounting standards update makes changes to the guidance for net assets classification, governing board designations, investment return, underwater endowment funds, expenses, liquidity and presentation of operating cash flows.
Summary of Changes
Net Assets Classification - Not-for-profit entities will have two classes of net assets, those that have donor restrictions and those that do not, as opposed to the current requirement of three classes.
Governing Board Designations - Not-for-profit entities will be required to provide enhanced disclosures about the amounts and purposes of governing board designations and appropriations.
Investment Return - Not-for-profits will be required to report investment return net of external and direct internal investment expenses. The requirement to disclose those netted expenses is eliminated.
Underwater Endowment Funds - In addition to the current required disclosure of the aggregate amount by which endowment funds are underwater, not-for-profit entities will be required to disclose the aggregate fair value of such funds as well as the aggregate original gift amounts to be maintained. All underwater endowment funds will be classified as part of net assets with donor restrictions rather than as a charge to unrestricted net assets as per current rules.
Capital Gifts – In the absence of explicit donor restrictions, not-for-profit entities will be required to use the placed-in-service approach to account for capital gifts. The current option to use the over-time approach has been elimintated.
Expenses - Expenses will be reported by nature in addition to by function, as currently required, and include an analysis of expenses by both nature and function. Also, there will be further disclosures required about the methods used to allocate costs among program and support functions.
Liquidity - To address diversity in practice related to liquidity, not-for-profits will be required to provide both qualitative and quantitative information about how it manages its liquid available resources and its ability to cover short-term cash needs within one year of the balance sheet date.
Presentation of Operating Cash Flows - Similar to current practice, not-for-profits will be able to decide whether to present operating cash flows using the direct method or the indirect method. The ASU eliminates the requirement to present or disclose the indirect method reconciliation if the not-for-profit decides to use the direct method.
What Changed from the Exposure Draft?
Much of the May 2015 exposure draft carried over to the final standard, but the FASB stepped back on some of its proposed changes after hearing feedback from stakeholders. It bracketed off changes to the definition of the term and presentation of operations as presented in the statement of activities to align with the measures of operations in the statement of cash flows into a Phase 2 of the project. It adjusted its disclosure requirements for liquidity and availability of resources to increase the comparability of the information that will be required to be provided. To reduce cost, the FASB also decided not-for-profit entities could continue to use either the direct method or the indirect method for the presentation of cash flows. The exposure draft included language that would have made use of the direct method mandatory.
Prepare for the Changes Now
Although it is designed to clarify financial statement reporting, the ASU will also require additional information from entities than what is required under the current guidance. It is expected that there will be costs involved in obtaining the necessary data relevant to the new liquidity disclosures as well as costs to update financial reporting processes and controls.
Not-for-profits should consider adjustments now to prepare for the changes. The ASU takes effect for fiscal years beginning after December 15, 2017, generally December 31, 2018 year ends and later.
In the coming months, we will explore the different elements of the accounting standards update in more detail. Stay tuned for our deeper dives into net asset classifications, governing board designations, investment returns, underwater endowment funds, expenses, liquidity and presentation of operating cash flows.
If you have any comments, questions or concerns about the changes to not-for-profit financial statement presentation, please contact us.
Michelle Spriggs is a Shareholder in the Not-For-Profit & Education Practice. She can be reached at 774.206.8336 or MSpriggs@cbiztofias.com.
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