On August 18, 2016, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) No. 2016-14 Presentation of Financial Statements of Not-for-Profit Entities that simplifies and improves how a not-for-profit organization classifies its net assets, as well as the information it presents in financial statements and notes about its liquidity, financial performance, and cash flows. This ASU completes the first phase of a two phase project to amend NFP financial reporting requirements.
“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,” said FASB Chair Russell G. Golden.
Specific concerns voiced by stakeholders included:
- Complexities in the use of the required three classes of net assets
- Deficiencies in the transparency and utility of information in assessing an organization’s liquidity
- Inconsistencies in the type of information provided about expenses, and
- Misunderstandings about and the limited usefulness of the statement of cash flows, particularly with regards to the reporting of operating cash flows.
“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,” Mr. Golden added.
The ASU requires improved presentation and disclosures to help not-for-profits provide more relevant information about their resources (and the changes in those resources) to donors, grantors, creditors, and other users.
The new standard includes qualitative and quantitative requirements in the following areas:
Net Asset Classes
- Revises the net asset classification scheme to two classes (net assets with donor restrictions and net assets without donor restrictions) instead of the previous three.
- Enhances disclosures for self-imposed limits (typically referred to as board designated) on the use of resources without donor-imposed restrictions and the composition of net assets with donor restrictions.
- Updates the accounting and disclosure requirements for underwater endowment funds. The standard requires that the aggregate amount by which endowment funds are underwater be classified within net assets with donor restrictions rather than the current unrestricted category. The standard also requires disclosures of an NFP’s policy, and any actions taken during the period, concerning appropriation from underwater endowment funds, the aggregate fair value of such funds, and the aggregate of the original gift amounts (or level required by donor or law) to be maintained.
- Requires, in the absence of explicit donor instructions, the placed-in-service approach for expirations of restrictions to acquire or construct long-lived assets, thus eliminating the over-time approach.
- Requires net presentation of investment expenses (both external and direct internal) against investment return on the statement of activities and eliminates the requirement to disclose investment expenses that have been netted.
- Requires the presentation of expenses (other than netted investment expenses) by function and nature in one location. That information can be reported on the face of the statement of activities, in a separate statement, or in the notes to the financial statements. In reporting its expenses, an NFP would be required to show the relationship between its functional and natural classification by disaggregating its functional categories by their natural classification.
- Requires enhanced disclosures about the method(s) used to allocate costs among program and support functions and improved guidance on management and general activities.
Liquidity and Availability of Resources
- Requires qualitative disclosures on how a not-for-profit manages its available liquid resources.
- Requires quantitative disclosures that communicate the availability of financial assets to meet cash needs for general expenditures within one year of the date of the statement of financial position. Availability of a financial asset may be affected by (1) its nature, (2) external limits imposed by donors, grantors, laws, and contracts with others, and (3) internal limits imposed by governing board decisions.
Statement of Cash Flows
- Allows for a choice between the direct and indirect method of reporting operating cash flows. Presentation of the indirect reconciliation is no longer required if using the direct method.
- The amendments in the standard 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 of the amendments in this standard is permitted.
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