New Developments for Presentation of Nonprofit Financial Statements

ASU 2016-14 | Summary of Changes to Not-for-Profit Financial Statements

Are you ready for significant changes to the financial statements of nonprofit organizations?

Overview:
The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-14 in an effort to improve the current net asset classification requirements as well as the information presented in financial statements and notes about a not-for-profit entity’s (NFP’s) liquidity, financial performance, and cash flows. The goal is for ASU 2016-14 to provide more useful information to donors, grantors, creditors, and other users of financial statements. Following is summary of the upcoming changes NFPs financial statements under this ASU including transition guidance.  NFPs should begin evaluating the impact of these regulations and plan their transition to the new guidance as quickly as possible.

A. Net Asset Classifications:

  • Current GAAP dictates that there are three net asset classifications:
    1. Permanently Restricted
    2. Temporarily Restricted
    3. Unrestricted
  • New ASU now permits only two net asset classifications:
    1. Without Donor Restrictions: Formerly known as Unrestricted
      • The amount, purpose, and type of board designations must be explicitly disclosed
    2. With Donor Restrictions: A combination of Temporarily Restricted and Permanently Restricted
      • Must disclose the type and purpose of restriction

B. New Disclosure Regarding Liquidity:

Required to disclose both qualitative and quantitative data regarding management of liquid resources:

  • Qualitative information:
    • Information that communicates how the NFP manages liquid resources available to meet cash needs in the year following the balance sheet date being audited.
  • Quantitative information:
    • Information that communicates the availability of an NFP’s liquid assets to fulfill cash needs/obligations in the year following the balance sheet date being audited. Availability may pertain to:
      • The nature of the account (i.e. accounts receivable vs. fixed asset)
      • External limits imposed by donors, laws, and contracts
      • Internal limits imposed by governing board.

C. Changes Regarding Underwater Endowments:

  • Underwater endowments must be shown net within the Net Assets With Restrictions. Previously, the underwater portion was shown as part of unrestricted net assets.
  • In addition to this new netting within Net Assets With Restrictions, the NFP must also disclose:
    • The Fair Value of the underwater endowment funds
    • The original endowment gift amount or level required to be maintained by donor stipulations or by law that extends donor restrictions
    • The amount of the deficiencies of the underwater endowment funds

 D. All NFP Entities Must Now Present an Analysis of Expenses by Functional and Natural Classification

  • In addition to the analysis, NFPs must disclose the methods used to allocate costs among program and support functions. An example of the disclosure can be found in FASB ASC 958-720-176.

E. An indirect reconciliation is no longer required for NFPs presenting Cash Flow Statements using the direct method.

F. Investment Return:

  • ASU 2014-16 distinguishes between:
    • Programmatic investing: directed at carrying out the NFP’s purpose for existence
    • Total return investing: general production of income or appreciate of an asset
  • The new standard requires investment expenses related to total return be netted again the total return investment income on the SOA and eliminates the disclosure of investment expenses that have been netted.
  • No longer required to disclose:
    • Investment income separate from net appreciation or depreciation of investments
    • The composition of investment return
    • A reconciliation of investment return to amounts reporting in the SOA if investment return is separated into operating and non-operating amounts.

Effective Date and Transition:

The update is now effective and in place for fiscal years beginning after December 15, 2017, and these changes are to be applied on a retrospective basis from the year they are first applied.

An exception to this is when performing a comparative set of financials; if the NFP entity did not previously have a Statement of Functional Expenses, they may omit the PY SFE for the first year applied. It is also permitted to omit the comparative disclosures about liquidity and availability of resources.

What’s Next?

Given the significant reporting and disclosure changes involved, all preparers and auditors involved with nonprofits should now be implementing these updates.  I have encouraged my clients to create an implementation plan and remain focused on the implementation efforts.  Also, engage your auditors and advisors in regular discussions so that all of your questions are answered and your reporting requirements are in compliance.

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Johnson Olatunji, CPA is an audit senior manager and has over 13 years of experience working with nonprofit organizations to achieve financial compliance and is highly skilled in Governmental Accounting Standards, financial audits, internal controls, financial reporting, and General Accepted Auditing Standards. Connect with Johnson via email or on LinkedIn.