The largest scale change in not-for-profit financial reporting since 1993 was issued on August 18, 2016 by the Financial Accounting Standards Board (FASB). Accounting Standards Update (ASU) No. 2016-14 Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities is the culmination of the first of two phases of the FASB Not-for-Profit Financial Reporting project.
FASB Chair Russel Golden stated in a news release,
“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. The new guidance simplifies and improves the face of the financial statements and enhances the disclosures in the notes—which will enable not-for-profits to better communicate their financial performance and condition to their stakeholders while also reducing certain costs and complexities in preparing their financial statements.”
This ASU has the potential to affect most not-for-profit entities, including charities, foundations, colleges and universities, health care providers, religious organizations, trade associations, social clubs, and cultural institutions.
The amendments are effective for fiscal years beginning after December 15, 2017. Early application is permitted.
Significant changes are:
- The statement of financial position (balance sheet) will present amounts for two new classes of net assets: net assets with donor restrictions and net assets without donor restrictions. The statement of activities (income statement) will present the amount of the change in the two new net asset classes. The current not-for-profit financial reporting model presents three classes of net assets: unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets.
- Adds the requirement to disclose expenses by both their natural classification (salaries, rent, supplies, etc.) and their function (program service, general and administrative, or fundraising). While this can be presented in the footnotes to the financial statements, this will likely result in most not-for-profit entities presenting a statement of functional expenses as part of their basic financial statements. The ASU will also require disclosure of methods used to allocate costs among program and support functions.
- For not-for-profit entities that present their statement of cash flows using the direct method, the requirement to present a reconciliation to the indirect method has been eliminated.
- Investment return is required to be presented net of external and internal expenses. Disclosure of the expenses netted against investment return will no longer be required.
- For not-for-profit entities who receive gifts of cash or other assets to be used to acquire or construct a long-lived asset, the option to release the donor-imposed restriction over the estimated useful life of the acquired asset will be eliminated. In other words, absent explicit donor restrictions to the contrary, the not-for-profit entity would be required to release donor-imposed restrictions when the asset is placed-in-service.
- The ASU also requires enhanced disclosures about:
- Amounts and purposes of governing board designations, appropriations, or 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 the resources.
- Quantitative and qualitative information that communicates the availability of a not-for-profit entity’s financial assets at the balance sheet date and how a not-for-profit entity manages its liquid resources available to meet cash needs for general expenditures within one year of the balance sheet date.
- Underwater endowments, which are currently reported as a reduction of unrestricted net assets, will be presented as a reduction to net assets with donor restrictions along with disclosures of policies, fair value, original gift amounts, and the endowment’s underwater status.
This ASU represents significant changes to the not-for-profit financial reporting model. Not-for-profit entities should understand these changes, the effect it will have on their financial statements and related disclosures, and begin to prepare as needed to implement these changes.
Contact Selden Fox for more guidance, expert analysis, and personalized support in implementing the required changes related to Not-for Profit financial reporting.