In 2016, the Financial Accounting Standards Board (FASB) released Accounting Standards Update (ASU) 2016-14 Presentation of Financial Statements of Not-for-Profit Entities. This update is comprised of several enhancements to the current financial statement and footnote format and content that are aimed at providing the readers of the financial statements with better information through greater transparency and increased comparability. At the core, this update focuses on presentation and disclosure matters rather than measurement and recognition. The update is effective for organizations with fiscal years beginning after December 15, 2017 (i.e. – effective for 2018 calendar year-ends and 2019 fiscal year ends). Let us take a few moments to unpack what is changing and what organizations can expect.
There are essentially six parts to ASU 2016-14 (with the fourth having seven smaller components).
- Statement of financial position – net asset classes
- Statement of activities – net asset classes
- Statement of cash flows – elimination of requirement for indirect reconciliation
- Enhanced disclosures
- Internally designated net assets
- Net assets with donor restrictions
- Liquidity and availability of resources – qualitative disclosures
- Liquidity and availability of resources – quantitative disclosures
- Functional expenses – presentation by nature AND function
- Functional expenses – disclosure of allocation methods
- Underwater endowments
- Returns on investments – shown net of fees
- Releasing donor restrictions related to acquisition of long-term assets
While we will not cover every part mentioned above, we will hone in on four areas that will prove the most significant for not-for-profits (NFP).
The core financial statements – the statements of financial position, activities, and cash flows will become somewhat more simplified. Net assets is currently broken out three ways – “unrestricted”, “temporarily restricted”, and “permanently restricted.” These three net assets classifications will be replaced with simply “without donor restrictions” and “with donor restrictions.” Regarding the statement of cash flows – if you present the direct method statement you are no longer required to provide an indirect reconciliation of cash flows from operations.
While the preceding three components tend to simplify disclosures for organizations, the fourth could be a little more challenging in that it generally adds disclosures rather than reduces. Let’s break it down.
4c & 4d – The NFP is now required to calculate and disclose “financial assets available to meet cash needs for general expenditures within one year”. Additionally, the NFP needs to also provide some narrative regarding how the entity manages their liquid available resources.
4e & 4f – Prior to the adoption of ASU 2016-14, organizations are required to disclose their expenses by function (i.e. – program, fundraising, management and general, etc.) only. Upon adoption of ASU 2016-14 organizations will now need to show their expenses by nature (i.e. – salaries, depreciation, rent, etc.) and function. This presentation can be achieved a few different ways – on the face of the statement of activities, in a separate statement of functional expenses, or a tabular format in the footnotes.
Additionally, organizations will now need to provide some qualitative disclosures as to how the allocations are being estimated.
For NFPs who hold investments, it is beneficial to the readers of the financials to get a sense for an all-inclusive investment return for the year. The new ASU requires that the entity show the year’s investment return net of investment expenses.
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