On August 18, 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-14, Not-for-Profit Entities (Topic 958) -Presentation of Financial Statements of Not-For-Profit Entities. While the name of the ASU seems fairly benign, this ASU represents the most significant changes in financial reporting for not-for-profit organizations since the FASB issued Statement No. 117 in June of 1993 – over 23 years ago.
Overall, the changes to financial reporting in ASU 2016-14 are fairly consistent with what was expected based off the FASB’s exposure drafts and related deliberations. In summary, the ASU makes the following significant changes:
Net Asset Classification
ASU 2016-14’s most significant change is in replacing the existing three classes of net assets (unrestricted, temporarily restricted, and permanently restricted) with two new classes – without donor restrictions, and with donor restrictions. ASU 2016-14 does not change requirements to present information about the nature of amounts of different types of donor-imposed restrictions, but adds requirements to disclose how those restrictions affect the use of resources, including liquidity. In addition, for underwater endowments, the new ASU will require additional disclosures surrounding a not-for-profit’s policy on underwater endowments, the aggregate fair value of underwater endowment funds, the aggregate original gift amounts to be maintained, and the aggregate amount by which funds are underwater, which are to be classified as part of net assets with donor restrictions. In addition, the ASU eliminates the over-time approach for the expiration of restrictions on capital gifts, and now requires the placed-in-service approach.
Information on Liquidity and Availability of Resources
Another significant change as a result of this ASU is the requirement to disclose both quantitative and qualitative information as to a not-for-profits available resources and its management of liquidity and liquidity risk. The quantitative information discloses the availability of the not-for-profit’s financial assets at the balance sheet date available to meet cash needs within one year of the balance sheet date. The qualitative disclosures will require a not-for-profit to disclose how they manage available resources to meet cash needs for general expenditures within one year of the balance sheet date.
Information about Expenses and Investment Return
As a result of this ASU, all not-for-profits will also be required to present expenses by both nature and function, as well as an analysis of expenses by both nature and function. This analysis can either be accomplished on the face of the financial statements, as a separate statement, or in the notes to the financial statements. In addition, a not-for-profit will be required to disclose the allocation methodology used to allocate expenditures among functions.
ASU 2016-14 will require not-for-profits to present investment returns, net of all related external and direct internal expenses, and eliminates the existing requirement to disclose the netted expenses.
Presentation of Operating Cash Flows
As it relates to the statement of cash flows, this ASU will continue to allow not-for-profits to utilize either the direct or indirect method of reporting operating cash flows; however, for those organizations that elect to utilize the direct method, there will no longer be a requirement to present a reconciliation to the indirect method.
ASU 2016-14 is effective for fiscal years beginning after December 15, 2017, with early application permitted. These changes, while significant, will ultimately help a reader of the financial statements to better understand the financial position of an organization and also enhance consistency among similar organizations. It is critical for not-for-profits to begin to understand these changes and assess the impact that they may have on their financial statements as soon as reasonably possible to determine what additional information they should be gathering. It is also critical that not-for-profits prepare the users of their financial statements, so that they understand the impacts of these new disclosures. Not-for-Profit organizations should also be aware that this is Phase 1 of the FASB’s not-for-profit reporting project, and should anticipate additional proposed changes on not-for-profit financial reporting.
A link to ASU 2016-14 can be found here.