The changes issued under the Financial Accounting Standards Board’s (FASB) Accounting Standards Update (ASU) 2016-14, Presentation of Financial Statements of Not-for-Profit Entities (ASU 2016-14) will bring more transparency to not-for-profit financial statement reporting.
Changes in ASU 2016-14 are designed to streamline reporting processes while also giving additional insight into underwater investments, expenses and liquidity. As part of our Introducing the New Not-for-Profit Financial Statement series, we’ll explore how not-for-profits can prepare for implementing the new standard. Not-for-profits should prepare for the effective date by ensuring their processes are ready for the new requirements and that they are prepared for the transition to ASU 2016-14.
Not-for-profit organizations must adopt the new standard for fiscal years beginning after December 15, 2017 (calendar year 2018). For many not-for-profit organizations with a summer year end, this means June 30, 2019 will be the first year of required implementation. Early adoption is allowed.
The standard follows a retrospective transition, which means not-for-profits must ensure all financial periods presented within the financial statement in the adoption year meet the new requirements.
Some not-for-profit organizations may provide comparative financial statements as part of their filings, and for these comparative statements, the FASB has provided some transition relief. Organizations may omit two pieces of information from financial statements for periods prior to the adoption date.
Not-for-profits may forgo the disclosures about liquidity and availability of resources for prior period financial statements in the first year of adoption. Organizations must still present expenses by functional classification and expenses by natural classification, but they will not be required to conduct analysis of both the natural classification and functional classification. An exception exists for organizations that were previously required to present a statement of functional expenses. Not-for-profits that previously had this requirement may present the comparative period information in any of the formats presented in ASU 2016-14, so long as the format is consistent with the presentation in the period of adoption.
Leave Time for Disclosures
ASU 2016-14 requires not-for-profit organizations to be more thorough with their financial statement disclosures. In preparation for adoption, organizations should review the disclosure requirements and ensure they have the necessary systems and processes to gather the information needed for the disclosures prior to the accounting standard update’s effective date.
Enhanced disclosures will be required for:
- Governing Board Designation: To increase transparency and clarify which assets are available for general use, not-for-profit organizations will 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.
- Donor Restrictions: Not-for-profits will disclose the composition of net assets with donor restrictions at the end of the period and how the restrictions affect the use of resources.
- Liquidity: Qualitative information that communicates how a not-for-profit manages its liquid resources will be required. Not-for-profits must clarify what is available to meet cash needs within one year of the statement of financial position (balance sheet) date. Information will also be required, either on the face of the balance sheet or in the notes, about the availability of a not-for-profit’s financial assets to meet cash needs within one year of the balance sheet date. Included in this information should be factors that affect use of financial assets, such as the nature of the financial assets, donor-imposed restrictions, legal restrictions and limits from the governing board.
- Expenses: Not-for-profits may present amounts of expenses by both their natural classification and their functional classification, either on the face of the statement of activities, as a separate statement, or in notes to financial statements.
- Cost allocation: Not-for-profits will be required to disclose the method(s) used to allocate costs among program and support functions. For example, an organization has expenses related to its building maintenance and therefore would disclose that expenses related to depreciation were determined by square footage. Administrative expenses, however, would likely have costs allocated based on time and effort estimates.
- Underwater endowment funds: Organizations should disclose any actions taken during the period concerning appropriation from underwater endowment funds; the aggregate fair value of such funds; the aggregate of the original gift amounts (or level required by donor or law) to be maintained; and the aggregate amount by which funds are underwater (deficiencies). Underwater funds are to be classified as part of net assets with donor restrictions.
Additionally, in the year of adoption, not-for-profit organizations will be required to disclose whether assets or other elements of the financial statement were reclassified and whether comparative financial statements were restated. If reassessments or restatements were made, not-for-profits will be required to disclose those changes as well as the impact of those changes on net assets for each period presented.
Assistance with the Implementation
If you need assistance with walking through the changes to your financial statement, please contact us.
- Presenting the New Not-for-Profit Financial Statement
- Net Asset Classes and Governing Board Restrictions
- Presentation of Operating Cash Flows and Investment Returns
- Proposed Technical Updates to Endowment Reporting
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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