Not-for-Profits: FASB’s New Standard Aims to Improve Financial Reporting
On August 18, 2016 the Financial Accounting Standards Board (“FASB”) released Accounting Standards Update (“ASU”) 2016-14, Presentation of Financial Statements of Not-for-Profit Entities (“NFP”). The new ASU marks the first phase of a larger project directed at improving not-for-profit financial reporting. The second phase will likely be considered as part of a broader FASB project to address the financial reporting model for all business entities. ASU 2016-14 changes the way all NFPs classify net assets and prepare financial statements. FASB believes the newly released ASU will improve NFP financial statements and provide useful information to donors, grantors, creditors and other financial statement users.
Adoption of FASB ASU 2016-14 will result in significant changes to financial reporting and disclosures as follows:
- Changes in the reporting of net assets
- Transparency and utility of information useful in determining an entity’s liquidity
- Changes in the reporting of expenses
- Statement of Cash Flows for entities using the direct method
Changes in the Reporting of Net Assets
Currently a NFP is required to distinguish between unrestricted, temporarily and permanently restricted net assets. Effective with the new ASU, NFPs will report unrestricted net assets as net assets without donor restrictions and will be required to combine temporarily and permanently restricted net assets into a single category called net assets with donor restrictions.
The NFPs will be required to disclose the amounts and purposes of different types of net assets with donor restrictions either on the face of the statement of financial position or in the notes.
An “underwater endowment” is defined as an endowment that has a current fair value that is less than the original gift amount or the amount required to be retained by donor or by law. Underwater endowments will be classified in net assets with donor restrictions and will require the following disclosures:
- The NFP’s policy to reduce expenditures or not spend from these underwater funds
- The aggregate fair value
- The aggregate original gift amount
- The amount of the deficiencies
Transparency and Utility of Information Useful in Determining an Entity’s Liquidity
NFPs will be required to disclose information about the availability of assets to meet cash needs for general expenditures within one year from the financial reporting date both qualitatively and quantitatively. A classified balance sheet is an effective way to comply with many of these disclosure requirements.
Changes in the Reporting of Expenses
NFPs will be required to report investment returns net of external and direct internal investment expenses, and the disclosure of the components of investment expenses will no longer be required.
NFPs often have expenses that are attributable to more than one program or supporting function which need to be allocated. In the future, the NFP will be required to disclose the methods used to allocate these costs.
Currently NFPs are required to report expenses by functional classifications such as programs and supporting activities. Effective with ASU 2016-14, all NFPs will be required to disclose expenses by their nature, such as payroll, rent and office expense, in addition to their function. This requirement can be met by either providing a separate statement, on the face of the statement of activities, or in the notes.
Statement of Cash Flows for Entities Using the Direct Method
NFPs can continue to use either the direct or the indirect methods to present cash flows from operations. NFPs will no longer be required to provide the indirect method reconciliation if they are using the direct method.
The standard is effective for annual financial statements issued for fiscal years beginning after December 15, 2017 and for interim periods within fiscal years beginning after December 15, 2018.
ASU 2016-14 should be applied on a retrospective basis in the first year the update is applied. NFPs will be required to disclose the nature of any reclassifications and restatements resulting from the adoption of this ASU and the effect on the changes in the net assets for each year or period presented.
Although the new standard is not effective immediately, FASB is encouraging early adoption. It would be prudent for NFPs to internally start discussing these new financial reporting changes and thinking ahead about implementation and compliance. For more information on FASB ASU 2016-14 or our services, please contact us at email@example.com or (212) 245-5900.
Marisa Pershad, CPA, CVA, is a Senior Audit Manager at Farkouh, Furman & Faccio with 35 years of experience with Investment Partnership, Broker Dealer, Real Estate, and Commercial clients. Marisa specializes in the audit of GAAP and OCBOA basis financial statements.