The Financial Accounting Standards Board (FASB) recently issued Accounting Standards Update 2016-14, providing changes to the financial reporting framework for not-for-profit organizations. This is the first major revision in over 20 years and aims to provide more transparency and improve comparability among Not-for-Profit Organizations (NPOs).
The major provisions from this update are as follows:
- Presentation of two classes of net assets (reduced from the previous three classes) – amounts with donor restrictions and amounts without donor restrictions
- Enhanced disclosures about amounts designated by the governing board and other self-imposed limits
- Qualitative and quantitative information on current financial resources (available to meet general expenditures over the next year) and any items that may affect the availability of these resources – such as restrictions to use or the nature and uncertainty of the value
- Expenses by both their natural (i.e. salaries, rent, utilities) and functional (i.e. program, administrative, fundraising) classification in one location either on the statement of activities, as a separate statement, or in the notes to the financial statements
- Methods used to allocate costs among programs and support functions
- Option to prepare the statement of cash flows using the direct method, without needing to also prepare a reconciliation of cash flow from operating activities using the indirect method
- Disclosure of investment expenses is no longer required, if shown as net with direct investment return
- Enhanced disclosures on underwater endowments, which will now be classified as a reduction in net assets with donor restrictions
The changes are to be effective for fiscal years beginning after December 15, 2017 (or for December 31, 2018 or June 30, 2019 fiscal year ends). Early application of the amendments is permitted, but should be applied retrospectively to prior years being reported. Retrospective application is not required for the analysis of expenses by natural and functional classification and disclosures about the liquidity and availability of financial resources.
These changes have come in joint effort with the FASB’s Not-for-Profit Advisory Committee (NAC), who meets twice a year to discuss financial reporting for not-for-profit entities, and represent phase 1 of a two-part proposal by the NAC. The major changes to come in future years are expected to be as follows:
- Presentation of an operating measurement on the statement of activities (currently, only required for healthcare NPOs)
- Enhanced disclosures on how the NPO defines its operations
- Realignment of certain items on the statement of cash flows (such as showing investment income as a cash inflow from investing activities, rather than operating)
Please contact a member of the Barnes Dennig Not-for-Profit Niche, filling out a brief form, or by calling 513.241.8313, if you have any further questions or concerns regarding the application of these new standards.