Complex. Lacking transparency. Of limited usefulness to readers. The 20-year-old not-for-profit financial reporting model was definitely showing its age.
In response, the Financial Account Standards Board (FASB) — after what it describes as extensive outreach with diverse groups of stakeholders — issued an updated standard that enhances disclosures and simplifies not-for-profit financial statements.
The update, ASU 2016-14, represents the first phase of the FASB’s project Presentation of Financial Statements of Not-for-Profit Entities.
Not-for-Profit Organizations Affected
According to the FASB, the updated standard affects a broad range of not-for-profit organizations, primarily including charities, colleges and universities, religious organizations, foundations, health care providers, cultural institutions and trade associations.
It also affects the users of not-for-profit financial statements.
Major Changes in ASU 2016-14
The main impacts of the update include the following:
Reduces net asset classifications from three classes (unrestricted, temporarily restricted, permanently restricted) to two classes (net assets with donor restrictions, net assets without donor restrictions).
Requires presentation of all expenses by nature and function — including an analysis of the relationship between functional and natural classification.
Requires net presentation of investment expenses against investment return on the Statement of Activities. Eliminates the requirement to disclose netted investment expenses.
Enhances disclosures for board designations and board-restricted funds.
Updates accounting and required disclosures for underwater endowment funds.
Requires qualitative and quantitative disclosures regarding how the organization manages its liquid resources.
Mandates disclosures regarding availability of financial assets to meet cash needs for general expenditures within one year of the Statement of Financial Position date.
Permits the use of either the direct or indirect method of reporting operating cash flows. Organizations using the direct method are no longer required to include an indirect reconciliation.
Requires use of the placed-in-service approach for releasing restrictions on gifts or other assets used to acquire long-lived assets — unless specified otherwise by the donor. This eliminates the option to release the restrictions over the life of the asset.
The not-for-profit financial reporting update is effective for fiscal years beginning after December 15, 2017, although it can be implemented earlier. For interim periods, it is effective for periods within fiscal years beginning after December 15, 2018.
Stay tuned for more details.
Do you have questions or concerns about the potential impact