On August 18, 2016, the Financial Accounting Standard Board (FASB) issued Accounting Standards Update (ASU) 2016-14, Presentation of Financial Statements for Not-for-Profit Entities, to improve financial reporting for nonprofit organizations. This completes Phase 1 of the not-for-profit (NFP) financial reporting project that addresses targeted improvements to the presentation of NFP financial statements. Phase 1 addresses current net asset classifications, enhances disclosure requirements about a NFP’s liquidity, financial performance and cash flows. FASB will address the operating measure for NFPs in Phase 2 at a later date.
The new standard affects substantially all NFPs. Mutual insurance entities, credit unions, cooperatives, and similar organizations classified as not-for-profit corporations are not in the scope of this standard.
This standard also represents the first major change to the financial statement presentation for NFPs since the issuance of FASB Statement No. 117, Financial Statements of Not-for-Profit Organizations, in 1993, which is currently used for preparation of GAAP basis financial statements.
Major changes included in the new standard are as follows:
Net Asset Classifications
- Currently there are three net asset classes (unrestricted, temporarily restricted and permanently restricted). This will be replaced with two new net asset classes – net assets with donor restrictions and net assets without donor restrictions. Temporarily restricted and permanently restricted net assets will be combined into the net assets with donor restrictions class. This change brings the financial reporting framework more in line with the current legal framework.
- The new standard retains current disclosure requirements for nature and amounts of different types of donor-imposed restrictions in the notes with an emphasis on how and when the resources can be used.
- Restricted contributions used to fund acquisition or construction of long-lived assets must be released in full when the asset is placed in service, thereby eliminating the option to release restrictions over the life of the property.
- Board designated net assets represent self-imposed restrictions on the use of funds without donor restrictions. Under the new standard, NFPs will be required to disclose the amount and purpose of each designation.
- The deficits of underwater donor-restricted endowment funds are currently carried in unrestricted net assets. Under the new standard, these funds will be reflected within net assets with donor restrictions. An NFP will also be required to disclose its interpretation of the ability to spend from underwater endowment funds and also any actions taken during the period concerning appropriations from underwater endowment funds, including noncompliance with its own policy, if applicable. NFPs will also need to disclose the aggregate fair value of the underwater funds, aggregate historic dollar amount and the aggregate amount of the deficiency.
Liquidity and Availability of Resources
This represents a significant change from the current standard and requires NFPs to:
- Disclose any board-designated restrictions, as of the end of the period.
- Disclose qualitative information on how the NFP manages its liquid available resources and liquidity risks.
- Disclose qualitative and quantitative information about the availability of the NFP’s financial assets at the balance sheet date to meet cash needs for general expenditures within one year to be presented on the face of the financial statement and/or in the notes.
- Investment return will continue to be presented net of investment expenses, including internal direct investment-related expenses. Disclosure of the components of investment expense is no longer required.
- In addition to the current requirement of reporting expenses by functional expense classifications (i.e. programs and supporting activities), all NFPs will be required to provide information about expenses by their nature. NFPs will also be required to provide an analysis of expenses by both nature and function. Enhanced disclosures are also required about the methods used to allocate costs among program and support functions.
Presentation of Operating Cash Flows
- This update provides an option for NFPs to present operating cash flows using either the direct method or the indirect method. If the direct method is used, then reconciliation to the indirect method may be reported but, is not required.
- The new standard is effective for fiscal years beginning after December 15, 2017, and for interim periods within fiscal years beginning after December 15, 2018. Early application of the standard is permitted. In the first year of application, NFPs are required to disclose the nature of any reclassifications or restatements resulting and their effect, if any, on the change in the net asset classes for each period presented. The standard must be applied on a retrospective basis; however, NFPs can elect to omit certain comparative disclosures in the year in which it is first applied.