The Financial Accounting Standards Board (FASB) released its Accounting Standards Update (ASU) 2016-14, Presentation of Financial Statements of Not-for-Profit Entities, on August 18, 2016. The Update modifies previous accounting standards and Generally Accepted Accounting Principles (GAAP) that have been in place for more than 20 years. According to the American Institute of CPAs (AICPA), it “will change the way all not-for-profits (NFPs) classify net assets and prepare financial statements.” The Update’s new standards are effective for annual financial statements issued for fiscal years beginning after December 15, 2017.
Why the Change?
The ASU represents the first of two phases of FASB’s project to improve the current net asset classification requirements and the information presented in financial statements and notes about a not-for-profit entity’s (NFP’s) liquidity, financial performance, and cash flows. According to FASB Chair Russell G. Golden:
While the current not-for-profit financial reporting model held up well for more than 20 years, stakeholders expressed concerns about the complexity, insufficient transparency, and limited usefulness of certain aspects of the model.
Some Major Changes
There will only be two classes of net assets:
- Net assets with donor restrictions. The part of net assets of a not-for-profit entity that is subject to donor-imposed restrictions (donors include other types of contributors, including makers of certain grants).
- Net assets without donor restrictions. The part of net assets of a not-for-profit entity that is not subject to donor-imposed restrictions (donors include other types of contributors, including makers of certain grants).
These two classes will replace the three existing classes of net assets many of us are familiar with (and confused about): unrestricted, temporarily restricted, and permanently restricted. This will change the way the statement of financial position (balance sheet) and the statement of activities (income statement) will be presented.
In addition, the ASU will require the enhanced disclosures about:
- 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.
- Composition of net assets with donor restrictions at the end of the period and how the restrictions affect the use of resources.
- 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 notes as necessary, 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) its nature, (2) external limits imposed by donors, grantors, laws, and contracts with others, and (3) internal limits imposed by governing board decisions.
- Amounts of expenses by both their natural classification and their functional classification [e.g., program service, general and administrative, or fundraising]. That 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.
- Method(s) used to allocate costs among program and support functions.
- Underwater endowment funds [i.e., endowments that have a current fair value that is less than the original gift amount (or amount required to be retained by donor or by law)], which include required disclosures of (1) an NFP’s policy, and any actions taken during the period, concerning appropriation from underwater endowment funds, (2) the aggregate fair value of such funds, (3) the aggregate of the original gift amounts (or level required by donor or law) to be maintained, and (4) the aggregate amount by which funds are underwater (deficiencies), which are to be classified as part of net assets with donor restrictions.
Nonprofits that elect to use the direct method of reporting on their statements of cash flow will no longer be required to present or disclose the indirect method (reconciliation)
Investment returns must be reported net of external and direct internal investment expenses and no longer will require disclosure of those netted expenses.
IN FOCUS: FASB Accounting Standards Update on Not-for-Profit Financial Statements (live webcast, Tuesday, September 13, 2016, 10:00–11:15 a.m. PDT)