The Financial Accounting Standards Board (“FASB”) has issued FASB Accounting Standards Update (“ASU”) No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities, which is an accounting standard that will impact several aspects of a not-for-profit organization’s financial statements. The provisions in the new standard represent some of the most significant changes to a not-for-profit organization’s financial statements since the FASB issued Statement No. 117 in June of 1993.
This new standard changes how a not-for-profit organization classifies its net assets, as well as the information it presents in financial statements and notes about its liquidity, financial performance, and cash flows. A summary of the main provisions of ASU 2016-14 is as follows:
- The standard changes the number of net asset classes from three classes (unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets) to two classes (net assets without donor restrictions and net assets with donor restrictions).
- Currently, not-for profits organizations present, on the face of the statement of cash flows, the net amount for operating cash flows using either the direct or indirect method. It the direct method is used, then a reconciliation with the indirect method is required. The new standard no longer requires this reconciliation if using the direct method.
- Not-for-profit organizations will be required to provide enhanced disclosures about how the organization manages its liquid resources available to meet cash needs for general expenditures within one year of the balance sheet date as the availability of a financial asset may be affected by (1) its nature, (2) external limits imposed by donors, grantors, laws, and contracts with others, and (3) internal limits imposed by governing board decisions.
- Currently, only voluntary health and welfare organizations are required to present expenses by their natural and functional classification. Going forward, all not-for-profit organizations will be required to present their expenses by both their natural and functional classification. This information may be provided in one location, which could be on the face of the statement of activities, as a separate statement, or in notes to financial statements.
- Not-for-profit organizations with endowment funds that are underwater will now classify their deficit in the endowment fund as part of net assets with donor restrictions. Currently, these deficits are presented as a reduction in unrestricted net assets.
- The standard will now allow a not-for-profit organization to report its investment return net of external and direct internal investment expenses and no longer require disclosure of those netted expenses. The goal is to provide a more comparable measure of investment returns across all not-for-profits, regardless of whether their investment activities (1) are managed by internal staff, outside investment managers, volunteers, or a combination or (2) employ the use of mutual funds, hedge funds, or other vehicles for which management fees are embedded in the investment return of the vehicle.
The new 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. The changes in this new standard should be applied on a retrospective basis in the year that the new standard is first applied.
Please contact Crosslin with any questions about how this new standard may impact your not-for-profit organization.