In August 2016, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update known as ASU 2016-14, Not-for-Profit Entities: Presentation of Financial Statements of Not-for-Profit Entities. This standard will take effect for fiscal years beginning after December 15, 2017 – essentially beginning with 2018 calendar year-end financial statements. This is the first significant update to accounting standards for nonprofits since 1993, when FASB issued Statement of Financial Accounting Standards (SFAS) No. 116 and No. 117. This update is the culmination of FASB’s Not-for-Profit Advisory Committee, which has been working since 2009 in an effort to help nonprofits produce more transparent and useful financial statements. Between this update and the earlier ASU 2016-02 (FASB’s major updates to lease accounting), 2016 saw quite a few accounting changes that will affect nonprofits.
The new Accounting Standards Update changes how the following components are presented on your nonprofit organization’s financial statements:
Liquidity and availability of resources
Nonprofits will now be required to provide qualitative information on how they manage liquidity (resources and risks). This information will communicate the availability of your organization’s assets, and your ability to meet expenses within the next year. While this information can be presented on the face of the financial statements, it is expected that most nonprofits will present this information as a note disclosure.
Within the statement of activities, investment return will be reported net of investment expenses. That means you’ll show your total expenses against your total return for any investment your organization may hold. However, you’re no longer required to separate and list the individual components of investment expenses.
While expenses will continue to be classified by function (most commonly presented as program, management/general, and fundraising), the new ASU requires that expenses also be classified by nature. This new presentation allows readers to easily see how nonprofits use their resources. Enhanced note disclosures will also describe the methods used to allocate costs among functional categories.
Net asset classification
Currently, there are three net asset classifications: temporarily restricted, permanently restricted, and unrestricted. These three categories have been combined into two: “net assets with donor restrictions” and “net assets without donor restrictions.” Internally, organizations will still need to track permanent restrictions - but they won’t be reported on the financial statements. The new ASU also requires enhanced disclosures for any endowments that are “underwater.”
Operating cash flows
While an early draft of this Accounting Standards Update required all nonprofits to use the “direct method” of reporting the operating section of the statement of cash flows, the final ASU (thankfully) does not include this requirement. Nonprofits may continue to present cash flows from operations using either the direct or indirect methods. If an organization chooses to use the direct method (more typical with larger nonprofits), they are no longer required to present a reconciliation of the change in net assets to the cash provided or used in operating activities.
FASB has included a thoughtful six-page summary within this ASU to explain the reasons for the update, who is affected, and a more extensive description and analysis of the main provisions of the ASU. The full text of ASU 2016-14 can be found on the FASB website.