FASB Releases “Once-in-a-Generation” Not-for-Profit Financial Statement Presentation Standard

Accounting standards update 2016-14, Presentation of Financial Statements of Not-for-Profit Entities, was issued by the Financial Accounting Standards Board (FASB) on August 18, 2016 and marked the first significant changes in the presentation of not-for-profit financial statements in over twenty years.

The FASB started this project in 2011 at the recommendation of its not-for-profit advisory committee, seeking to add clarity to the not-for-profit financial statements and make sure the financial reporting requirements for not-for-profit entities keep pace with the evolving needs of financial statement users.

What major changes are in store for not-for-profit financial reporting?  And why did the FASB enact these changes?

NET ASSETS – eliminate the confusion regarding the distinction between temporarily and permanently restricted net assets and also emphasize that it is the donor who establishes restrictions on these assets.

• The three existing classes of restricted assets (unrestricted, temporarily restricted and permanently restricted) have been condensed down to two classes (net assets with donor restrictions and net assets without donor restrictions).

• Disclosures include: the composition and impact of net assets with donor restrictions and any self-imposed limits on net assets without donor restrictions (i.e. “board designations”).

• Donor restrictions on capital assets can now only be released once the asset is placed in service.

• The “underwater” portion of an endowment fund is now recorded within net assets with donor restrictions and additional disclosures are required regarding the not-for-profit entity’s policies related to “underwater” endowments, the fair value of these funds, the aggregate of the original gift amount/level of funding required to be maintained by donor or law and the aggregate amount by which funds are “underwater”.

LIQUIDITY – provide the financial statement user more information regarding the not-for-profit entity’s available financial resources and how they manage these resources

• Qualitative information will be disclosed regarding how the not-for-profit manages its liquid resources to meet cash needs within one year of the financial statement date.

• The amount of liquid assets “available” to meet these needs will also be disclosed or presented on the face of the financial statements. “Availability” may be affected by the nature of the financial assets and external (i.e. donors, laws, etc.) and/or internal (i.e. board decisions) limits placed on the assets. 

EXPENSES – give the financial statement user a better understanding of the not-for-profit entity expenses (i.e. how fixed/discretionary they are, how they are allocated, etc.)

• Expenses will need to be presented by their “natural” (salaries, rent, etc.) and “functional” (program, management and general, fundraising) classifications, either in the statement of activities, as a separate statement, or in the footnotes.

• Disclosure of how the functional allocations were determined is now required.

INVESTMENT RETURN – improve comparability amongst not-for-profit entities

• Investment return will be presented net of all related internal and external investment expenses and the disclosure of those netted expenses is no longer required.

STATEMENT OF CASH FLOWS – retain flexibility/freedom in financial reporting

• Direct and indirect cash flow methods are permitted and if the direct method is used, the separate indirect method reconciliation is no longer required.

Who is affected?

Substantially all not-for-profit entities – especially those that receive restricted contributions.

When will the financial reporting requirements enacted by the accounting standard update become effective?

The accounting standard update, and its amendments to financial reporting for not-for-profit entities, are effective for fiscal years beginning after December 15, 2017 (December 15, 2018 for interim periods within fiscal years) and early application of the accounting standard update is permitted.

How do I implement the new accounting standard?

The financial reporting amendments made by the accounting standard update should be implemented on a retrospective basis.  When presenting comparative financial statements, all requirements, save the “EXPENSES” and “LIQUIDITY” requirements, as described above, should be applied to the prior period.  And in the period they are first applied, the not-for profit entity should disclose any reclassifications and/or restatements made and their impact on changes in net asset classes for each period presented.

KatzAbosch welcomes the opportunity to further discuss this new accounting pronouncement with you and evaluate its impact on your not-for-profit organization.  Feel free to contact Timothy Redmond (tredmond@katzabosch.com) or Clem Mueller (cmueller@katzabosch.com) for additional information.

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