New accounting standards update means sweeping changes to not-for-profit reporting

For the first time in over 20 years, there will be changes to the way not-for-profit organizations are required to present their financial statements.

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-14, Not-for-Profit Entities (Topic 958), Presentation of Financial Statements of Not-for-Profit Entities on Aug. 18, 2016. This update enables not-for-profits to better tell their financial story, to make the financial statements more useful to readers, and to provide more consistency in reporting between organizations.

New requirements

The new ASU requires these changes in the following categories.

Net asset classification

• Present two classes of net assets — net assets with donor restrictions and net assets without donor restrictions — instead of unrestricted, temporarily restricted, and permanently restricted on the face of the statement of financial position, and present the changes in these two classes on the statement of activities.
• Disclose the amount, purpose, and type of board-designated net assets.
• Classify the underwater amounts of donor-restricted endowment funds in net assets with donor restrictions. The update also requires disclosure of the aggregate fair value of underwater funds, the original gift amount (or amount required to be maintained by the donor or law), and the governing board policy and decisions made to spend, or not spend, from such funds during the year.
• Use the placed-in-service approach (where donor restrictions are released as assets are placed in service) for gifts of cash or other assets restricted for acquisition or construction of a long-lived asset such as property, plant, and equipment.

Expense reporting

• Report expenses in one location, either on the face of the statement of activities or in the notes, by both their function (already required for some entities under existing standards) and natural classification.
• Provide disclosures about methods used to allocate costs among program and support functions.

Reporting of investment returns

• Net external and direct internal investment expenses against investment return for presentation on the face of the statement of activities.
• Disclosure of netted amounts is no longer required, except for the disclosure of the amount of internal salaries and benefits that have been presented net against investment return.

Liquidity information

• Disclose qualitative information on how the organization manages its liquid resources.
• Disclose quantitative and qualitative information that communicates the availability of the organization’s current financial assets at the statement of financial position date to meet near-term cash needs for general expenditures.

Statement of cash flows

Organizations may still choose between the direct method and the indirect method; however, disclosure of the indirect method reconciliation is no longer required when using the direct method.

ASU effective dates

The ASU is effective for fiscal years beginning after Dec. 15, 2017, and for interim periods within fiscal years beginning after Dec. 15, 2018. Early adoption is permitted.

The amendments should be applied retrospectively to all periods presented. If the not-for-profit presents comparative financial statements, it has the option to omit the following information for any periods presented before the year it adopts the ASU:

• Analysis of expenses by both functional and natural classifications
• Disclosures about liquidity and availability of resources

In the year of adoption, not-for-profits should disclose the nature of any reclassifications or restatements and any effects on the changes in their net asset classes for each year that’s presented.

The history

The previous reporting requirements for not-for-profit organizations fell under FASB Statement No. 116 and Statement No. 117, which the FASB issued in 1993.

In November 2011, the FASB announced two projects on their agenda that were intended to improve the financial reporting of not-for-profit entities. The objectives of these projects were based on suggestions received by the board from the Not-for-Profit Advisory Committee, known as the NAC. The projects included one standard-setting project and one research project. The objective of the research project was to study communications other than financial statements that not-for-profit entities use to tell their financial story. In 2014, the FASB voted to remove the research project from its agenda.

The standard-setting project moved forward and in April 2015, an exposure draft was released with the comment period ending in August 2015. In October 2015, the board decided to split the proposed update into two phases:

• Phase one. This included issues that weren’t dependent on other FASB projects and were improvements the FASB believed could be finalized in the near term. The ASU that was issued in August 2016 includes the items that were included in phase one.
• Phase two. This phase includes matters that need further consideration as they may be impacted by decisions made in the Financial Performance Reporting project, which the FASB currently has on its agenda.

More changes to come

The FASB views ASU 2016-14 as phase one — the beginning of guidance to result from its multiyear review of the not-for-profit financial reporting model. In the review, the FASB identified additional, more radical changes as well as controversial proposals that they decided to put off until phase two. Such proposals include whether and how to define the term operations and align measures of operations (or financial performance) as presented in a statement of activities with measures of operations in a statement of cash flows.