In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-14, Presentation of Financial Statements of Not-for-Profit Entities. This is the first major change in nonprofit financial reporting in over 25 years. Below is a brief overview of the changes resulting from the new guidance. ASU 2016-14 is designed to reduce complexity, increase understandability and use to stakeholders, and assist nonprofits with improved financial reporting.
A summary of the changes included in this update is as follows:
- Statement of Cash Flows: Although both the direct method and indirect method of presenting the statement of cash flows may still be elected; when using the direct method, presentation of the indirect reconciliation is no longer required.
- Net Asset Classification: The new ASU requires that nonprofits report under two net asset classifications in the statement of financial position and statement of activities: Without Donor Restrictions and With Donor Restrictions, rather than three net asset classifications required under the current guidance: Unrestricted, Temporarily Restricted, and Permanently Restricted Net Assets. The amounts of each of the two net asset classes and total net assets must be reported on the statement of financial position. Nonprofits may break down the net asset classes further as deemed necessary. Additionally, nonprofits must report the amount of the change in each of the two new classes of net assets rather than the current three classes of net assets on the statement of activities.
- Functional Expenses: Under the new guidance, nonprofits must report expenses by both natural classification (salaries, rent, depreciation, etc.) and functional classification (program, management and general, and fundraising). The method used to allocate cost among program and support functions must be disclosed. Nonprofits may present expense classifications in the following permitted formats:
- On the face of the statement of activities
- As a schedule in the notes to financial statements
- In a separate financial statement
- Enhanced Disclosures: There are a handful of new footnote disclosures or changes to footnote disclosures that relate to a wide array of topics:
- Self-imposed and donor-imposed restrictions
- Qualitative and quantitative information about management of liquid resources
- Expenses detailed out by natural classifications and functional classifications
- Methods used to allocate costs among programs and support functions
- Policies and values of underwater endowment funds
- Investment Return: Investment returns are to be reported net of external and direct internal investment expenses. Internal investment expenses that have been netted against investment returns should not be included in the functional expense analysis. Disclosure of netted expenses is no longer required.
- Placed-in-Service Approach: In the absence of explicit donor stipulations, the FASB now requires the use of a placed-in-service approach for reporting expirations of restrictions on gifts of long-lived assets (or cash to acquire long-lived assets). The amounts should be reclassified from net assets with donor restrictions to new assets without donor restrictions for long-lived assets that were placed in service as of the beginning of the period of adoption. The current option to release restrictions over the estimated useful life of the acquired asset is eliminated.We will discuss in further detail the impact of ASU 2016-14 on the statement of cash flows, net asset classification, and functional expenses in our August, September, and October 2018 web articles. Stay tuned!
Nonprofit organizations are required to adopt these changes for fiscal years beginning after December 15, 2017.
For general questions or additional support about implementation, feel free to contact Kristi Yanover, Audit Partner, at firstname.lastname@example.org, or any member of our Accounting & Assurance Team.