FASB Issues New Reporting Standard for Not-for-Profit Entities
The Financial Accounting Standards Board (FASB) released the Accounting Standards Update (ASU) 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities on Aug. 18, 2016.
The standard aims to improve presentation of financial information, ultimately making not-for-profit financial reporting statements more informative, transparent and useful to donors, grantors and other users. This is the first major change to the nonprofit financial statement model in over 20 years.
ASU 2016-14 impacts all not-for-profit entities in the scope of Accounting Standards Codification (ASC) Topic 958. The ASU addresses the following key qualitative and quantitative matters:
- Net asset classes
- Investment return
- Liquidity and availability of resources
- Presentation of operating cash flows
In addition, the ASU includes illustrative financial statements for not-for-profit entities, which reflect changes made by the new standard.
HCC Observation: The change in presentation for net asset classes will garner the majority of attention but do not overlook the potential impact of the remaining components of the new standard on your organization’s financial reporting.
Net asset classes:
The effects of the ASU on net asset classes are as follows:
The current presentation of three classes of net assets (unrestricted, temporarily restricted and permanently restricted) is replaced with two classes of net assets–net assets with donor restrictions and net assets without donor restrictions. The totals of these two required net asset categories must be reported in the balance sheet and the changes in these two net asset categories must be presented in the statement of activities. However, this is a minimum presentation requirement. An entity may choose to disaggregate within these two net asset categories.
The current requirement to provide information about the nature and amounts of different types of donor-imposed restrictions is retained and includes the need to highlight how these restrictions affect the use of the resources and their impact on liquidity.
Changes the net asset classification of underwater amounts of donor-restricted endowment funds to net assets with donor restrictions and requires additional disclosures related to these underwater endowment funds.
Eliminates the over-time approach for the expiration of restrictions on capital gifts and requires the use of the placed-in-service approach in the absence of donor explicit stipulations otherwise.
HCC Observation: While many entities will chose to move from three to two net asset classes on the balance sheet, the distinction between temporarily restricted and permanently restricted accounts will still need to be tracked and disclosed in the footnotes to the financial statements
The ASU requires the following items with regard to investment return (relates to total return investing and not programmatic investing):
Investment return should be presented in the statement of activities net of all related external and direct internal expenses. The ASU provides definitions and examples of what qualifies for direct internal expenses to assist entities with this presentation.
The current requirement to disclose the netted investment expenses has been eliminated.
All nonprofit organizations currently must present expenses by function. The ASU introduces a requirement to present expenses by nature and function, as well as an analysis of these expenses in one location by both nature and function. The intent is to provide additional information to the users of the financial statements regarding how the nonprofit uses its resources. This analysis can be presented in the face of the statement of activities, as a separate statement (not a supplemental statement) or in the notes to the financial statements.
This analysis should be supplemented with enhanced disclosures about the allocation methods used to allocate costs among the functions.
Liquidity and availability of resources:
To improve the ability of financial statement users to assess a nonprofit entity’s available financial resources and the methods by which it manages liquidity and liquidity risk, the ASU contains specific disclosures including:
Qualitative information that communicates how a nonprofit entity manages its liquid available resources to meet cash needs for general expenditures within one year of the balance sheet date.
Quantitative information that communicates the availability of a nonprofit’s financial assets to meet cash needs for general expenditures within one year of the balance sheet date. Items that should be taken into consideration in this analysis are whether the availability of a financial asset is affected by its nature, external limits imposed by grantors, donors, laws and contracts with others, and internal limits imposed by governing board decisions.
Presentation of Operating Cash Flows:
The ASU maintains the option for nonprofit organizations to present their statement of cash flows on either the direct or indirect method of reporting. If an organization chooses to use the direct method, the reconciliation of changes in net assets to cash provided by (used in) operating activities is no longer required.
Effective Date of ASU:
The amendments in ASU 2016-14 are effective for annual financial statements issued for fiscal years beginning after Dec. 15, 2017 (2018 for calendar year ends and 2019 for fiscal year ends), and for interim periods within fiscal years beginning after Dec. 15, 2018. Application to interim financial statements is permitted but not required in the initial year of application. The amendments in this ASU can be adopted early. Entities presenting comparative financial statements must apply the amendments retrospectively; however, the following optional practical expedients are available for periods presented prior to adoption. For prior periods presented organizations can opt not to include:
- The analysis of expenses by nature and function and/or,
- Disclosures related to liquidity and availability of resources.
HCC Observation: The first reporting periods that will reflect the new standard are December 31, 2018 for calendar year-ends and mid-year 2019 for fiscal year-ends. However, retrospective application is required so management should be familiar with the new reporting requirements and should begin to accumulate necessary information during the year preceding the initial presentation requirements.
Actions to Take Now:
Read through the ASU and watch for further alerts with more details related to the implementation of this ASU.
Discuss the new ASU with your audit committee, board members and external auditors to prepare for implementation.
On the Horizon:
This ASU completes the first phase of the FASB’s project to improve the financial reporting of not-for-profit entities. The FASB determined that a second phase would consider other potential changes that are likely to require more time to resolve, including potentially reconsidering intermediate operating measures and certain other enhancements.