An update released by the Financial Accounting Standards Board (“FASB”) on August 18, 2016 is the first in a set of major changes which will substantially affect all nonprofit entities (“nonprofits”) and users of their financial statements.
The Accounting Standards Update (“ASU”) 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities, focuses on improving current net asset classification requirements and information presented in the financial statements and notes useful in assessing the nonprofit’s liquidity, financial performance and cash flows. The ASU provides examples illustrating how these changes affect the nonprofit financial statement presentation and reporting.
Specific changes included in the new ASU are:
Net Assets
- Replaces the current three classes of net assets (unrestricted, temporarily restricted and permanently restricted) with two new classes – net assets with donor restrictions and net assets without donor restrictions.
- Disclosures are still required to include information about the nature and amounts of donor imposed restrictions, including time, purpose and perpetuity.
- Disclosures on the amount and purpose of Board Designated funds,
- Underwater endowments will no longer be reclassified out of donor restricted funds, but will be included in donor-restricted endowment funds and additional disclosures will be required.
- Absent explicit restrictions, capital gifts that are for the acquisition or construction of long-lived assets will be required to be released when the asset is placed in service rather than recognizing the expiration of donor restrictions over time.
Liquidity and Available Resources
- Qualitative footnote disclosures are required on how a nonprofit manages its liquid available resources to meet cash flow needs for general expenditures within one year of the statement of financial position date.
- Quantitative footnote disclosures are required on how a nonprofit communicates the availability of its financial resources to meet cash flow needs for general expenditures within one year of the statement of financial position date. Availability may be affected by: nature, external limits imposed by donors, grantors, or laws and internal limits imposed by Board decisions.
Functional Expense Reporting and Investment Return
- All nonprofits are now required to provide expenses by nature and function on the face of the statement of activities, in a separate statement or in the notes to the financial statements.
- Enhanced disclosures will be required about the methods used to allocate costs across functions.
- Investment return is to be presented net of all direct internal and external expenses, no disclosure of such expenses is now necessary.
Cash Flow Statement
- Nonprofits still have the option to choose between the direct and indirect method in presenting operating cash flows.
- If the direct method is used, the reconciliation using the indirect method is no longer required.
Effective dates – fiscal years beginning after December 15, 2017, interim periods within fiscal years beginning after December 15, 2018.
Implementation – Early application is permitted and is to be applied on a retrospective basis. For comparative financials, the nonprofit can omit the functional expense schedule for the prior period (if not previously required) and the liquidity disclosures.
Look for more information from Smith & Howard in the coming months. If you have any questions about the update, please contact Sean Taylor or Kimberly Bland at 404-874-6244.
Available resources for more information: