The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-14 that will soon affect Not-for-Profit (NFP) entities. This update was established to provide more relevant, useful information to grantors, donors, and other stakeholders of NFP entities. The new standard will take effect for annual financial statements for fiscal years beginning after December 15, 2017, and for interim periods within fiscal years beginning after December 15, 2018. The FASB allows for early adoption of the new guidelines. The key provisions in this ASU are listed below.
Net Asset Classes – The three net asset classes – unrestricted, temporarily restricted, and permanently restricted – will be condensed into two net asset classes. Net assets will now be shown on the statement of financial position as net assets with donor restrictions or as net assets without donor restrictions. The changes in these two classes of net assets will be presented on the statement of activities. The current distinction between temporary and permanent restrictions has become blurred by changes in state laws. This change is expected to simplify the presentation of and improve the consistency of reporting donor-imposed restrictions in the financial statements.
The new standard will also require enhanced disclosures regarding the nature and type of donor-imposed restrictions, including purpose and time restrictions, as well as the amount and purpose of resources restricted by board designation. These disclosure requirements will be more detailed than current requirements, but should provide more useful information to the users of the financial statements in understanding the nature and duration of restrictions. There will also be additional disclosures for underwater endowments and changes in the how those deficiencies are reported in the financial statements.
Liquidity and Availability of Resources – NFP organizations will be required to provide qualitative information about how available liquid resources are managed to meet cash needs for general expenditures within one year of the date of the statement of financial position, and quantitative information about the availability as of date of the financial statements to meet those cash needs. This change is expected to increase transparency about the nature and extent of both internal and external limits on available resources and to help assess the organization’s financial flexibility. Organizations should begin to consider the types and amounts of liquid resources they will have available to meet these cash needs.
Expenses – NFP organizations will be required to report expenses by both nature and function in one location. This analysis may be done on the face of the financial statements, in a separate statement of functional expenses or in the notes to the financial statements. While a separate statement of functional expenses is not mandatory, it may be the most effective way of presenting this information. This information is expected to provide users of the financial statements with a greater understanding about how the entity uses its resources.
Investment Return – NFP entities will be required to report investment returns net of both internal and external investment related expenses resulting in a more comparable measure of investment returns regardless of whether investments are managed by internal staff or outside advisors and whether fees are imbedded in the return of the investment vehicle. In addition, the disclosure of the amount of fees that were netted against investment income will no longer be required which will eliminate the need to identify embedded fees.
Presentation of Operating Cash Flows – NFP entities will still be able to choose between the direct or indirect method for the presentation of operating cash flows on the statement of cash flows, but will no longer be required to present or disclose the indirect method reconciliation when using the direct method. The elimination of the indirect method reconciliation is intended to encourage the use of the direct method which is considered easier to understand.
The provisions outlined above were in response to recommendations made by the FASB’s Not-for-Profit Advisory Committee. In a second phase, the FASB plans to address additional issues which will include defining the term operations and aligning the measures of operations used in the statement of activities with the statement of cash flows. Formal guidance has not yet been released, but we will keep you informed on any updates. If you have any questions, please do not hesitate to contact the team at Howe, Riley & Howe.