The Financial Accounting Standards Board (FASB) has issued the first substantial changes to not-for-profit financial statement presentation standards since 1993.
Accounting Standards Update No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities, issued by the FASB on Aug. 18, incorporates recommendations by the board’s Not-for-Profit Advisory Committee and other stakeholders, who said that existing standards were sound but needed to provide better information to users of not-for-profit financial statements.
“While the current not-for-profit financial reporting model held up well for more than 20 years, stakeholders expressed concerns about the complexity, insufficient transparency, and limited usefulness of certain aspects of the model,” FASB Chairman Russell Golden said in a prepared statement.
The changes will allow not-for-profits to better communicate their financial performance and condition, as well as reduce some costs and complexities in preparing financial statements, he added.
The new accounting standard will take effect for annual financial statements issued for fiscal years beginning after Dec. 15, 2017, and for interim periods within fiscal years beginning after Dec. 15, 2018. The standard can be applied to interim financial statements, but it isn’t required in the first year of application. Early application is allowed.
The Accounting Standards Update makes changes within the following four categories:
Net Asset Classification
- Replaces the existing three classes – unrestricted, temporarily restricted, and permanently restricted – with two new classes: net assets with donor restrictions and net assets without donor restrictions.
- Current requirements for information about different types of donor-imposed restrictions remain but are highlighted as to how those restrictions affect resources, including liquidity.
- The net asset classification of the underwater amounts of donor-restricted endowment funds is changed and requires additional disclosures for underwater endowment funds.
- The overtime approach for the expiration of restrictions on capital gifts is eliminated in favor of the placed-in-service approach when there are no specific donor stipulations.
Information About Liquidity and Availability of Resources
The new standard requires:
- Qualitative information that describes how not-for-profits manage their liquid available resources to meet cash needs for general expenditures within a year of the balance sheet date.
- Quantitative information that describes the availability of financial assets at the balance sheet date to meet cash needs for general expenditures within a year of that date. Asset availability may be affected by its nature; external limits set by donors, grantors, laws, and contracts; and internal limits imposed by governing board decisions.
Information About Expenses and Investment Return
- Not-for-profits must provide expenses by nature and function, as well as an analysis of expenses by both nature and function. This analysis can be presented on the face of the statement of activities, as a separate statement, or in the notes to the financial statements – supplemented with enhanced disclosures about the methods used to allocate costs among functions.
- Not-for-profits must present investment return net of all related external and direct internal expenses. The current required disclosure of those netted expenses is eliminated.
Presentation of Operating Cash Flows
- Not-for-profits can continue to present the net amount of operating cash flows using the direct or indirect method of reporting, but eliminates the required presentation or disclosure of the indirect method reconciliation if the direct method is used.
Got questions? The FASB will host a webinar from 1 to 2:15 p.m. EDT on Sept. 13 about the new standard. Viewers can submit questions and will be eligible for up to 1.5 hours of continuing professional education credit. You can register here.
About Terry Sheridan
Terry Sheridan is an award-winning journalist who has covered real estate, mortgage finance, health care, insurance, personal finance, and accounting and taxation issues for newspapers, magazines, and websites. A Chicago native and former South Florida resident, she now lives in New England.