On August 18, 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-14, Presentation of Financial Statements for Not-for-Profit Entities (Topic 958). The first of a two-phase project, the newly released ASU is intended to improve presentation and disclosures and provide more relevant information about a not-for-profit’s resources and the changes in those resources to users of the financial statements. The new standard is intended to simplify how not-for-profits (NFPs) classify net assets and improve information provided about NFPs’ liquidity, financial performance, expenses, and cash flows. Adoption of FASB ASU 2016-14 will result in significant changes to financial reporting for NFPs.
The standard is 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. Application to interim financial statements is permitted but not required in the initial year of application. Early application of the amendments of FASB ASU 2016-14 is permitted.
Net Asset Classifications
With the new ASU, the three existing classes of unrestricted, temporarily restricted, and permanently restricted net assets are replaced with two new classes of net assets:
- Net assets without donor restrictions.
- Net assets with donor restrictions.
FASB ASU 2016-14 retains the current requirements to provide information about the timing, nature and amounts of donor-imposed restrictions, highlighting how those restrictions affect the use of resources, including their liquidity.
Underwater Endowments
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), known as underwater endowments, will now be classified in net assets with donor restrictions, instead of the current classification in unrestricted net assets. Expanded disclosures will also be required to include the fair value of the underwater endowment funds, the original amount of the endowment, the amount of the deficiencies of the underwater endowment funds, the NFP’s policy relating to spending from these funds and any actions taken during the period concerning appropriation from underwater endowment funds.
Board-designated Net Assets
An NFP’s governing board may make decisions that result in internal limits on the use of resources without donor restrictions, known as board-designated net assets. Enhanced disclosure information will be required regarding the amounts and purposes of these designations or appropriations.
Restrictions Related to Long-Lived Assets
In the absence of explicit donor stipulations, the placed-in-service approach is required for reporting expirations of restrictions on gifts of cash or other assets used to acquire or construct a long-lived asset. Amounts will be reclassified from net assets with donor restrictions to net assets without donor restrictions for long-lived assets that have been placed in service upon adoption of the ASU. The current option to imply a time restriction and release the restriction over an asset’s useful life is eliminated.
Qualitative and Quantitative Liquidity Information
The ASU requires NFPs to provide 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 (statement of financial position) date. Additionally, quantitative information about the availability of an NFP’s financial assets to meet cash needs for general expenditures within one year of the balance sheet date is required, either on the face of the balance sheet or in the footnotes. Availability of a financial asset may be affected by its nature, external limits, or internal limits. FASB believes presenting a classified balance sheet may assist NFPs in complying with the ASU.
Reporting Financial Performance Measures
NFPs will be required to report the amount of change in each of the two classes of net assets in the statement of activities, as well as the total change in net assets for the period. Presenting an intermediate measure of operations remain allowable; however, NFPs are required to disclose additional information about the items included or excluded from the operating measure.
Presentation of Investment Expenses
NFPs will be required to report investment return net of external and direct internal investment expenses. Disclosure of netted investment expenses will no longer be required.
Analysis of Expenses by Function and Nature
An analysis of expenses by both function and natural classification will be required for all NFPs in one location, which could be on the face of the statement of activities, as a separate statement, or in the footnotes. While a separate statement of functional expenses is not required, it may be the most effective presentation option for NFPs with more than one program. Investment expenses that have been netted against investment return are not permitted to be included in that analysis. NFPs are also required to disclose a description of the methods used to allocate costs among program and support functions.
Statement of Cash Flows
Under the new standard, NFPs may continue to present cash flows from operations using either the direct or indirect method. However, NFPs will no longer be required to present or the indirect method reconciliation if the direct method is used.
Implementation of the New Standard
NFPs may need to gather and/or obtain incremental data for use in preparing new disclosures of the ASU. NFPs should also consider how to communicate the effects of the changes in the presentation of the financial statements to users of the financial statements. The amendments in the ASU should be applied on a retrospective basis in the year that the ASU is first applied. However, if presenting comparative financial statements, the NFP has the option to omit the following information for any periods presented before the period of adoption:
- Analysis of expenses by both natural classification and functional classification (the separate presentation of expenses by functional classification and expenses by natural classification is still required). NFPs that were previously required to present a statement of functional expenses do not have the option to omit this analysis; however, they may present the comparative period information in any of the formats permitted in the ASU, consistent with the presentation in the period of adoption.
- Disclosures about liquidity and availability of resources.
In the period that the ASU is adopted, an NFP should disclose the nature of any reclassifications or restatements and their effects, if any, on changes in the net asset classes for each period presented.
Phase 2
A future Phase 2 of the FASB’s project to improve the information presented in financial statements of NFPs will address additional issues including:
- Operating measure:
- Whether to require intermediate measure(s)
- Whether and how to define such measure(s) and what items should be included
- Alignment of measures of operations in the statement of activities with measures of operations in the statement of cash flows.
There is currently no expected timeframe for the completion of the second phase.
Additional Resources
The FASB has organized a webcast providing an overview of the new standard. Details are provided below:
IN FOCUS: FASB Accounting Standards Update on Not-for-Profit Financial Statements
Tuesday, Sept 13, 2016 (1:00 -2:15pm EST) Recommended CPE Credit: 1.5
Learn how the FASB’s new standard will affect your not-for-profit organization or clients. Understand the key elements of the ASU, how they are a change from current GAAP, and broadly understand the new presentation and disclosure requirements.
During this webcast, you will have the opportunity to submit questions to the panelists. This CPE-eligible event is free.
As a leader in serving the NFP industry, Sikich is committed to keeping you informed and up-to-date on matters affecting you. If you have any questions or need more information on these or any other NFP issues, please contact one of our NFP executives.
