It is hard to believe the time has gone by so quickly in my professional career. It seems like only yesterday I was reading FASB Statements No. 116 and 117. These statements, which were issued in the early-1990’s, set forth the accounting and reporting requirements for contributions received and contributions made and the requirements for financial statements of not-for-profit (NFP) organizations, respectively. As a result of these two standards, the accounting and reporting by all not-for-profit organizations was fundamentally altered from the era of fund accounting to an accounting and financial reporting model based on the existence or absence of donor-imposed restrictions. It still is hard to believe the accounting and reporting landscape for not-for-profit organizations was radically changed by two standards which contained only 30 and 31 paragraphs, respectively!
Fast forward to 2016 and the issuance on August 16, 2016, of Accounting Standards Update (ASU) 2016-14 Not-for-Profit Financial Statements. This “update” to the not-for-profit reporting standards consists of 233 pages of information, with the stated goal to “improve the current net asset classification requirements and the information presented in financial statements and notes about a not-for-profit entity’s (NFP’s) liquidity, financial performance, and cash flows.” The FASB’s Not-for-Profit Advisory Committee (NAC) and other stakeholders indicated that existing standards for financial statements of NFPs are sound but could be improved to provide more useful information to donors, grantors, creditors, and other users of financial statements.
Significant elements of the new accounting standard include the following items:
- The requirement for NFP organizations to report on the face of the statement of financial position (balance sheet) using two net asset classifications, i.e., with and without donor restrictions, as opposed to the existing requirement to report using three net asset classifications, i.e., unrestricted, temporarily restricted and permanently restricted.
- Reporting on the face of the statement of activities the change in net assets using the same two categories as the statement of financial position.
- Removal of the requirement, if preparing the statement of cash flows using the direct method, to reconcile the overall change in net assets to the net cash flow from operating activities.
- A substantial increase in the footnote disclosures in NFP financial statements to include information about:
a. Amounts and purposes of governing board designations, appropriations, and similar actions that result in self-imposed limits on the use of resources without donor-imposed restrictions as of the end of the period.
b. Composition of net assets with donor restrictions at the end of the period and how the restrictions affect the use of resources.
c. Qualitative information that communicates how a NFP manages its liquid resources available to meet cash needs for general expenditures within one year of the balance sheet date.
d. Quantitative information, either on the face of the balance sheet or in the notes, and additional qualitative information in the notes as necessary, that communicates the availability of an NFP’s financial assets at the balance sheet date to meet cash needs for general expenditures within one year of the balance sheet date. Availability of a financial asset may be affected by (1) its nature, (2) external limits imposed by donors, grantors, laws, and contracts with others, and (3) internal limits imposed by governing board decisions.
e. Analysis of expenses by both their natural classification and their functional classification. That analysis of expenses is to be provided in one location, which could be on the face of the statement of activities, as a separate statement, or in notes to financial statements.
f. Method(s) used to allocate costs among program and support functions.
g. Underwater endowment funds, which include required disclosures of (1) an NFP’s policy, and any actions taken during the period, concerning appropriation from underwater endowment funds, (2) the aggregate fair value of such funds, (3) the aggregate of the original gift amounts (or level required by donor or law) to be maintained, and (4) the aggregate amount by which funds are underwater (deficiencies), which are to be classified as part of net assets with donor restrictions.
- The requirement to report investment return net of external and direct internal investment expenses and the elimination of the requirement to disclose the amount of the netted expenses.
- Use, in the absence of explicit donor stipulations, the placed-in-service approach for reporting expirations of restrictions on gifts of cash or other assets to be used to acquire or construct a long-lived asset and reclassify any amounts from net assets with donor restrictions to net assets without donor restrictions for such long-lived assets that have been placed in service as of the beginning of the period of adoption (thus eliminating the current option to release the donor-imposed restriction over the estimated useful life of the acquired asset).
While the ASU also lists as one of its objectives “..to reduce the complexities..” of reporting by NFP organizations I am not sure that this will be achieved. A number of the new disclosure requirements will result in the need for significant critical and analytical thinking as an NFP develops the necessary disclosures. Also, a number of areas of new disclosure focus on matters that have historically been outside the main target of financial reporting and disclosure.
I would strongly encourage you to consider the impact of this standard on your financial reporting practices. Also, the need to develop new information as a part of your financial reporting model will most likely be required. As the standard is effective for years beginning after December 15, 2017, you should all be well on your way to planning for its implementation!
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.