On August 18, 2016, the Financial Accounting Standards Board, (FASB) issued an Accounting Standards Update, that has been designed to “help not-for-profits tell their story through their financial statements.”
The Accounting Standards Update, ASU No. 2016-14, entitled Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities, decreases the number of net asset classes from three to two. The new classes will be:
- Net assets with donor restrictions
- Net assets without donor restrictions
The existing guidance has been in effect since 1993, and while it has held up well over that time, “stakeholders expressed concerns about the complexity, insufficient transparency, and limited usefulness of certain aspects of the model,” FASB Chairman Russell Golden said in a statement to the press. “The new guidance simplifies and improves the face of the financial statements and enhances the disclosures in the notes,” he added.
Details of the New Guidance for Non-Profit’s Financial Statements
The ASU modifies the presentation and disclosure requirements with the intention of helping not-for-profits “better tell their stories,” by providing more relevant information about their resources.
Specifically the new standard:
- Requires reporting of the underwater amounts of donor-restricted endowment funds in net assets with donor restrictions and enhances disclosures about underwater endowments.
- Continues to allow preparers to choose between the direct method and indirect method for presenting operating cash flows, eliminating the requirement for those who use the direct method to perform reconciliation with the indirect method.
- Requires a not-for-profit to provide in the notes qualitative information on how it manages its liquid available resources and liquidity risks. Quantitative information that communicates the availability of a not-for-profit’s financial assets at the balance sheet date to meet cash needs for general expenditures within one year is required to be presented on the face of the financial statement and/or in the notes.
- Requires reporting of expenses by function and nature, as well as an analysis of expenses by both function and nature.
The experts at MBAF can be instrumental in ensuring your financial statements are in compliance, and are being used to your greatest advantage under the new FASB guidelines.
When Do the Changes Take Effect?
ASU 2016-14 will take effect for annual financial statements issued for fiscal years beginning after Dec. 15, 2017, and for interim periods within fiscal years beginning after Dec. 15, 2018. Application to interim financial statements is permitted but not required in the initial year of application, and early application of the standard is permitted.
Compliance and regulatory issues surrounding non-profit entities and particularly FASB Accounting Standards Updates, can be quite complex. If you would like to benefit from our expertise in these areas or if you have further questions on this Advisory, do not hesitate to contact our Non-profit specialists, or call us at 1-800-239-1474.