The Financial Accounting Standards Board (FASB) has released Accounting Standards Update No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements for Not-for-Profit Entities. These changes present a radical shift in how financial statements and notes are prepared and presented for not-for-profit (NFP) entities.
For an NFP, I believe the amendments presented will both simplify the reporting process and allow the NFP to focus on preparing and presenting the information that is most critical for the users of its financial statements.
For the user of an NFP’s financial statements, I believe the amendments will eliminate parts of the financial statements that may seem confusing or outdated, and will also enhance the information provided in other parts of the document. The result is a clear picture of the NFP’s liquidity and financial performance.
Why is the FASB issuing this Update?
FASB seeks to improve the current net asset classification requirements and the information presented in financial statements and notes about an NFP’s liquidity, financial performance, and cash flows to provide more useful information to donors, grantors, creditors, and other users of financial statements.
What are the Main Provisions of the Update?
The main provisions of the Update accomplish the following:
- Requires an NFP to present on the face of the statement of financial position amounts for two classes of net assets at the end of the period, net assets with donor restrictions and net assets without donor restrictions, rather than for the currently required three classes.
- Eliminates the requirement to present or disclose the indirect method (reconciliation) if using the direct method for presentation of the statement of cash flows.
- Provides enhanced disclosures regarding:
a. The effects, if any, of the limits on the use of resources imposed by an NFP’s governing board, donors, grantors, laws,and contracts on an NFP’s liquidity, financial flexibility, and allocation of resources;
b. How an NFP manages its liquidity to meet short-term demands for cash
c. The types of resources used and how they are allocated in carrying out an NFP’s activities
d. The effects, if any, of methods used for allocating costs among an NFP’s program and supporting activities
e. The effects, if any, of underwater endowment funds on an NFP’s spending policies and its financial flexibility.
- Requires an NFP to report investment return net of investments expenses, but no longer requires disclosure of those netted expenses.
- Requires an NFP to use the placed-in-service approach, absent specific donor restrictions stating otherwise, for reporting expirations of restrictions on gifts to be used to acquire or construct a long-lived asset.
When Will the Amendments Be Effective?
The amendments in the Update 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 adoption is permitted. NFPs should apply the amendments on a retroactive basis in the year that the Update is first applied.
The amendments in this Update make improvements to address many, but not all, of the identified issues about the current financial reporting for NFPs. Look for further updates as FASB is expected to issue a second phase of the project. Phase two is expected to address more protracted issues surrounding whether and how to define the term operations and align measures of operations (or financial performance) as presented.
Johnson Olatunji,CPA is an audit senior manager and has over 12 years of experience in Governmental Accounting Standards,financial audits, internal controls, financial reporting, and General Accepted Auditing Standards. Connect with Johnson via email or on LinkedIn.