In August 2016, the Financial Accounting Standard Board (FASB) issued Accounting Standards Update (ASU) No. 2016-14, Presentation of Financial Statements of Not-for-Profit Entities, which is aimed at improving the existing standards for financial statement presentation by non-for-profit (NFP) organizations. The new standards should have an impact on substantially all NFPs, and some will be affected more than others.
The new presentation standards 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 application is permitted.
The main provisions addressed in ASU 2016-14 include:
• Net asset classes
• Investment return
• Liquidity & availability of resources
• Presentation of operating cash flows
Net Asset Classification
The new guidance replaces the three classes of net assets (unrestricted, temporarily restricted, and permanently restricted) with two classes of net assets – net assets with donor restrictions and net assets without donor restrictions. Ultimately, entities will no longer be required to distinguish between temporary and permanent restrictions on the face of the financial statements. The new standard retains the requirement to disclose the nature and amounts of donor-imposed restrictions. The ASU also added a new requirement to disclose board designations on net assets without donor restrictions, whereas previously, this disclosure was optional. On the statement of activities, a NFP will present the amount of the change in each of these two net asset classes.
In addition, the net asset classification of underwater amounts of donor-restricted endowment funds will be classified as part of net assets with donor restrictions. Additional disclosures related to these underwater endowment funds are required; a change from current practice of classifying this amount as unrestricted.
The ASU requires external and direct internal investment expenses to be netted against investment returns and reported in the net asset category in which the net investment return is reported. In addition, these expenses are no longer required to be disclosed.
Before the updated standard, not-for-profit entities must present expenses by function. The update now requires NFPs to disclose an analysis of expenses by both functional and natural classifications and should be supplemented with disclosures about the methods used to allocate costs among the functions.
With intentions of improving the ability of financial statement users to assess an NFP’s available financial resources and liquidity, the ASU requires specific disclosures including; quantitative and qualitative information about “the availability of” and “how” a nonprofit entity manages its liquid available resources to meet cash needs for general expenditures within one year of the balance sheet date. Items to consider in this analysis are whether the availability of a financial asset is affected by its nature, external limits imposed by grantors, donors, laws, and contacts with others, and internal limits imposed by governing board decisions.
Statement of Cash Flows
The ASU maintains the option for NFP entities to present either the direct or indirect method of reporting operating cash flows. However, the indirect method reconciliation is no longer required to be presented if the organization chooses to use the direct method.
By: Alex Speight, CPA