In August 2016, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU 2016-14) in order to simplify the financial statements of non-profits. The new standard helps to improve the financial presentation of the non-profit’s financial statements as well as provide more transparency in the note disclosures.
Effective Date: For annual financial statements issued for fiscal years beginning after December 15, 2017 and for interim periods within fiscal years beginning after December 15, 2018. Early implementation is permitted.
Here are the areas where requirements have changed in financial reporting for not-for-profit organizations:
- Net Asset Classes
- Investments Return
- Expenses
- Liquidity and Availability of Resources
- Presentation of Operating Cash Flows
Net Assets Classes
- Reduces the number of net asset classifications from three to two: (1) Net Assets with Donor Restrictions and (2) Net Assets without Donor Restrictions
- Footnote disclosures will be required to include:
- Timing and nature of restrictions
- Composition of net assets with donor restrictions at the end of the period
- Analysis by time, purpose, and perpetual restrictions
- For example:
Net assets with donor restrictions are restricted for the following purposes or periods:
| Subject to expenditure for specified purpose: | |
|---|---|
| Program A activities: | |
| Purchase of Equipment | $3,060 |
| Research | $950 |
| Program B activities: | |
| general | $2,000 |
| Buildings and Equipment | $2,240 |
| $8,250 | |
| Subject to the passing of time: | |
| For periods after 20X1 | $5,250 |
| Subject to Entity’s spending policy and appropriation: | |
| Investment in perpetuity | $102,157 |
| Total Net Assets with Donor | |
| Restrictions | $115,657 |
Investment Return
- ASU changes the presentation of investment income to require non-profits to report investments returns net of any related external and direct internal investments expenses on the Statement of Activities.
- External investment expenses include advisory fees and other investment management fees
- Internal investment expenses include salaries, benefits, and other expenses of individuals hired by the organization to manage their investments internally.
- ASU eliminated requirement of footnote disclosure for investment expenses
Expenses
- ASU requires not-for-profits to present their expenses both in natural and functional classifications
- This can be presented within the statement of activities, in a separate statement of functional expenses or in the notes to the financial statements
Liquidity and Availability of Resources
- ASU enhanced disclosure regarding liquidity by requiring not-for-profits to provide Qualitative and Quantitative information on the liquidity and availability of its financial assets
- Qualitative: Not-for-profits must disclose how it manages its liquid available resources to meet operational needs within one year of the balance sheet in the notes to the financial statements
- Quantitative: Not-for-profits must disclose the availability of the organization to meet current-year needs either on the face of the financial position or in the notes to the financial statements
Presentation of Operating Cash Flows
- Not-for-profits are permitted to choose to present either the direct method or the indirect method of statement of cash flows
- ASU no longer requires not-for-profits to provide an indirect reconciliation of operating cash flows if the not-for-profit chooses the direct method.
Questions?
Contact: Terri Lynn Wallace, CPA
Audit Manager