Change is an inevitable part of life. Over the last few years, the Financial Accounting Standards Board (FASB) has issued several accounting standards updates (ASUs) that will result in changes to financial statements. One such pronouncement, ASU 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities, will change several aspects of the financial statement reporting of nonprofit organizations.
Following are the most significant changes required by this ASU:
- Net Asset Classification – Organizations must move from three classifications (permanently restricted, temporarily restricted, and unrestricted) to two classifications (net assets with donor restrictions and net assets without donor restrictions).
- Underwater Endowments – The full balance of an underwater endowment fund will be included in net assets with donor restrictions, whereas the current guidance requires the original endowment gift balance to be maintained in permanently restricted net assets with the balance underwater included as a reduction to unrestricted net assets.
- Liquidity Measures – Current guidance requires organizations to present line items on the balance in order of liquidity. Under the new standard, organizations will also be required to include qualitative and quantitative information in the financial statements to help the reader understand the availability of the organization’s assets to meet general expenditures within the next year.
- Functional Expense Reporting – All nonprofits will be required to report information about expenses by function (program, management and general, fundraising, and membership development) and nature (salaries, rent, utilities, etc.) in one location. This can be accomplished through the addition of a statement of functional expenses, which is currently only required to be presented by voluntary health and welfare organizations, presentation in the statement of activities, or disclosure in the footnotes.
- Investment Return Reporting – Investment earnings will be required to be presented net of all external and direct internal investment expenses. These investment expenses should then be excluded from the functional expense analysis. The new standard eliminates the option for organizations to report gross investment earnings with the expenses included in the functional expense allocation.
- Statement of Cash Flows – If the direct method is used for the statement of cash flows, organizations will no longer be required to present a reconciliation of operating cash flows to the change in net assets.
- Restrictions on Long-lived Assets – In the absence of donor stipulations, restrictions on assets used to acquire or construct a long-lived asset will expire when the asset is placed in service, whereas the current guidance allows organizations to amortize the restriction over the useful life of the asset.
With some exceptions, the changes in this ASU must be applied retrospectively and are effective for fiscal years beginning after December 15, 2017; however, organizations can choose to early adopt the standard.
This ASU changes the financial statement presentation for these transactions, but does not change the accounting for the transactions. Though change can be difficult, not all change is bad. The intent of this updated standard is to remove diversity in current practice and to provide more relevant information to the users of the financial statements. Making more relevant information available to donors, grantors, and other financial statement users should allow nonprofit organizations to better tell their story through their financial statements, which is a good change.