July 12, 2017 § Leave a comment
Change and transition. Those are everyone’s favorite things, right? Accounting is always changing, and the Financial Accounting Standards Board (FASB) continues to work on projects and updates to improve the information provided to users of financial statements. In August 2016, FASB released Accounting Standards Update 2016-14 Presentation of Financial Statements of Not-for-Profit Entities (ASU 2016-14). The goal of ASU 2016-14 is to improve the information presented in the financial statements and notes about a not-for-profit entity’s (NFP’s) liquidity, financial performance and cash flows. The idea is that this will give donors, grantors, creditors and others a better picture of the organization through the financial statements.
Of course, these improvements come with a lot of change and transition that will be necessary in order to implement this new presentation. While change and transition can sometimes be overwhelming and maybe even scary, the good news is there is time before the required implementation date. The effective date is financial statements issued for fiscal years beginning after December 15, 2017. That means if you are a June 30 year end, the new presentation is not required until your financial statements for the year ended June 30, 2019. While 2019 may seem to be far in the future, if you present comparative financial statements, you will want to start thinking about those effects now so that you are ready to make the transition when the time comes to implement.
Below is a summary of the most significant changes:
- NFP’s will present two classes of net assets (with donor restrictions and without donor restrictions) instead of three (unrestricted, temporarily restricted and permanently restricted).
- NFP’s may use either the direct or indirect method of reporting cash flows, and no reconciliation to the indirect method is required if the direct method is used.
- Enhanced disclosures regarding:
- Self-imposed limits or designations on the use of resources without donor restrictions,
- Composition of net assets with donor restrictions,
- Qualitative and quantitative information for how the entity manages its liquid resources available to meet cash needs for general expenditures within one year of the balance sheet date,
- Expenses by both their natural classification and their functional classification along with the method used to allocate costs among program and support functions, and
- Underwater endowment funds including policy concerning appropriations from the funds and amount by which the funds are deficient.
- NFP’s will report investment return net of expenses, and there will be no requirement to disclose those expenses.
- In the absence of explicit donor stipulations, gifts of cash or other assets used to acquire or construct long-lived assets will move to net assets without donor restrictions when that asset is placed in service.
I recently attended the American Institute of Certified Public Accountants (AICPA) Not-for-Profit Conference in Washington, D.C. The consensus at the conference was that NFP’s would likely have the most challenges with the liquidity disclosures and the classification of costs. AICPA has provided some great templates for these items, and we will be passing along these templates to our clients this fall. In the meantime, be sure you are asking your accounting department, CPA or Finance Committee about these very important changes so that we may all work together to make this change a smooth transition.