The standards not-for-profit organizations use to prepare their financial statements and related footnotes, have gone untouched for 20 years. But all that has changed with the Financial Standards Board’s (FASB) accounting standards update No. 2016-14, Presentation of Financial Statements of Not-for-Profit Entities.
“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 Russell Golden, chairman of the FASB, in a release. “The new guidance simplifies and improves the face of the financial statements and enhances the disclosures in the notes.”
This particular guidance is the first part of a two-phase project. In a nutshell, the accounting standards update is an attempt by the FASB to make immediate improvements with regard to:
- Complexity in net asset classification.
- Clarity of information regarding liquidity and availability of cash.
- Transparency with regard to reporting its financial performance measures.
- Consistency in reporting expenses by their function and nature.
- Utility of the statement of cash flows.
Some organizations will find the changes resulting from FASB’s accounting standards update to be challenging. The following list identifies the specific changes required to take place over the next few years. Not-for-profit leaders are encouraged to consider these changes as early as possible to avoid any issues or challenges that may arise.
new asset classifications
The first major change nonprofit leaders will notice is the decrease in the number of net asset classes. Rather than working with three classes, the new rule limits the classes to two: net assets with donor restrictions and net assets without donor restrictions.
underwater endowments
Endowments currently valued less than the original gift amount will now be classified as net assets with donor restrictions, rather than using the current classification in unrestricted net assets. These disclosures must include the original amount of the endowment, the organization’s policy pertaining to how these funds are to be spent and a note that states whether the nonprofit’s policy was followed.
board-designated net assets
Enhanced disclosure information will be required on the amounts and purposes of any designations or appropriations resulting in self-imposed limits on the use of resources without donor restrictions. Furthermore, the option to imply a time restriction and release the restriction over an asset’s useful life will no longer be permitted.
transparency & utility of liquidity information
To provide financial statement users with a complete understanding of the organization’s risks, as well as how they intend to manage the nonprofit’s liquidity risk, information about its liquidity will be required. A classified balance sheet can help in complying with this and many of the other new disclosure requirements.
reporting financial performance measures
In addition to reporting any changes in total net assets for the period, now nonprofits must also report the amount of change in each of the two classes of net assets in the organization’s statement of activities.
presentation of investment expenses
A net presentation of investment expenses against the investment return will still be required on the face of the statement of activities. However, the organization is no longer required to disclose components of the investment expense.
expenses classified by function & nature
An analysis of expenses by function and natural classification is required as well as additional disclosures regarding specific methodologies used to allocate costs among program and support functions.
presentation of cash flow information
If the direct method is used, nonprofits are no longer required to present the indirect method reconciliation. This gives the organization the ability to select the presentation method (indirect or direct) that best meets the organization’s specific needs without additional disclosure.
“I believe it’s a really good move forward,” said Lee Klumpp, former member of the FASB Industry Fellowship Program, in an interview with Accounting Today. “It makes improvements in areas where it was needed, such as net asset classes. It allows some flexibility and alternatives for nonprofits to explore other ways of presenting and communicating their financial results and operations.”
The new guidance pertains to all not-for-profit organizations that file financial statements in accordance with generally accepted accounting principles, including charities, religious organizations, private colleges and universities.
This new standard is effective for fiscal years beginning after December 15, 2017, and for interim periods within fiscal years beginning after December 15, 2018. Early adoption is permitted with retrospective application required.
Find out how you can use these new standards to initiate greater financial transparency while providing donors and other stakeholders with more useful information. Email Rea & Associates to learn more.
By: Mark Beebe, CPA (Zanesville office)
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