New Accounting Standard Brings Big Changes to Not-for-Profit Financial Reporting

Not-for-profit organizations will see big changes coming soon to their financial reporting. After years of discussion, the Financial Accounting Standards Board (FASB) issued a new accounting standard aimed to improve not-for-profit financial reporting.

The new standard intends to help not-for-profits provide a clearer picture regarding net asset classifications, create more consistency in reporting, including enhanced disclosure requirements, between organizations, and allow for presentation of the direct method of presenting operating cash flows without requiring an indirect method reconciliation.

Accounting Standard Update (ASU) 2016-14, Presentation of Financial Statements of Not-for-Profit Entities was released in August 2016 but will not go into effect until fiscal years beginning after December 15, 2017. While it may seem like the distant future, many organizations are taking steps to integrate these changes now. Take a look at what changes are in store and decide if early adoption is right for your organization. To read the standard in its entirety, please visit the FASB’s website here.

Changes Impacting Financial Statement Presentation

• Report within the Statement of Financial Position and the Statement of Activities two classifications of net assets – “Net Assets With Donor Restrictions” and “Net Assets Without Donor Restrictions,” in place of the current presentation of unrestricted, temporarily restricted and permanently restricted classifications.
• Present investment expenses net of external and direct internal investment income within the Statement of Activities.
• Present within the Statement of Cash Flows the net operating amounts using the direct method or indirect method without the requirement to include an indirect method reconciliation if the direct method is selected by the Organization.
• 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).

Additional Changes Within the Notes to the Financial Statements or the Statements

Enhanced disclosure requirements or changes to the statements include:

• Disclosure of amounts and purposes of board-designated funds or similar actions resulting in self-imposed limitations on resources as opposed to donor-imposed limitations.
• Presentation of qualitative information to showcase how the Organization manages its liquid resources to meet cash needs for general expenditures within one year of the balance sheet date.
• Presentation of quantitative and qualitative information, as necessary, either within the Balance Sheet or in the notes to the financial statements, communicating the availability of financial assets at the balance sheet date to meet cash needs for general expenditures within one year of the balance sheet date.
• Disclosure of the composition of net assets with donor restrictions and the related impact on the use of the organizational resources.
• Reporting of expenses by functional classification and natural classification in one location either within the Statement of Activities, as a separate statement, or in the notes to the financial statements.
• Disclosure of methods used to allocate costs amount program and support functions.
• Reporting of underwater endowment funds as a part of the the net asset classification “With Donor Restrictions.”
• Required disclosures in the notes to the financial statements pertaining to underwater endowments including the Organization’s policies, actions taken during the period concerning appropriation from underwater endowment funds, the aggregate fair value of such funds, the aggregate of the original gifted amount, and finally, the aggregate amount by which funds are underwater or deficient.

Next Steps

ASU 2016-14 brings a number of financial reporting changes to not-for-profit organizations and is considered the first phase in an initiative aiming to provide more clarity in the presentation of not-for-profit financial statements. The second phase will focus on addressing whether and how to define the term operations and how to better align measures of operations in the Statement of Activities with measures of operations in the Statement of Cash Flows.

Please contact me at sgumley@bpw.com if you are interested in learning more about this accounting standard update or would like to discuss early adoption of this standard. We will continue to provide you with information on the new requirements and future developments.