You have probably heard by now that there’s an update just around the corner regarding the presentation of not-for-profit financial statements. FASB has issued ASU 2016-14, as an update to the current not-for-profit financial statement model with hopes to improve net asset classification, information shown in financial statements and disclosures, and how not-for-profits tell their financial story. This ASU was issued last August (2016) and is effective for fiscal years beginning after December 15, 2017, (December 31, 2018 audit for calendar year ends and June 30, 2019 audit for June fiscal year ends). Early adoption is permitted, but you must apply all transition provisions in the year of transition. For comparative years, both periods presented must conform to the new standard, however you can choose to not include an analysis of expenses by nature and function (unless already required to do so in current GAAP) and/or disclosures around liquidity and availability of resources.
FASB feels that the classification of temporary restricted net assets is hodgepodge and has decided to collapse temporarily and permanently restricted net assets into one donor-restricted classification. They feel using disclosures will provide more information than the current classifications. Under the new ASU, net assets are now classified as either without donor restrictions, with a new requirement to disclose the amount, purpose and type of designations; or with donor restrictions and then disclosures will provide the nature and amount. FASB believes the new disclosures will better show how the nonprofit is managing its resources and will be able to better “tell its financial story.” FASB also stated that many have believed unrestricted net assets to mean without any restrictions, when it really means without donor-imposed restrictions.
FASB decided that an organization needs to disclose qualitative and quantitative liquidity information. For qualitative disclosures, the disclosure needs to state how the entity manages its liquid available resources and its liquidity risks. For quantitative disclosure, the disclosure needs to state the amount of financial assets, amounts not available to meet cash needs, to arrive at financial assets available to meet cash needs for general expenditures within one year.
For the statement of activities, all revenues resulting from carrying out the nonprofit’s purpose for existence, and are available for current period activities, would qualify as operating revenues. All expenses incurred in carrying out those activities will qualify as operating expenses. Donor-restricted contributions to support operating activities do not qualify as current period revenue until the period the restriction is either met or expires. Revenues and expenses from or for investing or financing activities do not qualify as operating.
Some other changes include the following:
- Organizations have a choice between using the direct or indirect method for operating cash flows. If the direct method is chosen, the indirect reconciliation is no longer required.
- For gifts of cash restricted for acquisition or construction of PP&E, in absence of explicit donor restrictions, NFP’s will be required to use the placed-in-service approach (no more implied time restrictions).
- Endowments considered to be “underwater,” meaning to hold a value less than it was at the time of original funding, need to be reflected in net assets with donor restrictions rather than in net assets without donor restrictions. Underwater endowments also require enhanced disclosures such as to the aggregate of original gift amounts, fair value, and any governing board policy, or actions taken, concerning appropriation from such funds.
- Lastly, investment return must be presented net of external and direct internal investment expenses on the face of the statement of activities. Investment expenses and investment return components are no longer required to be disclosed.
This ASU is new to everyone and there are many pieces to it, so please don’t hesitate to contact us at 973-740-9100 for further clarification.
To sum things up, here’s a flowchart summarizing the key provisions of ASU 2016-14: