In August 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-14 Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities. This ASU resulted from discussion by the FASB’s No-for-Profit Advisory Committee (NAC) and extensive comments from the nonprofit community on ways to improve and update the not-for-profit (NFP) financial reporting model. The ASU focuses on addressing transparency, reducing complexities, and increasing useful information and consistency in financial reporting.
ASU 2016-14 is the first of a two-phase project initiated by the NAC. Some of the significant changes that arise from its passage include the following:
Net Asset Classification
The ASU will reduce the net asset classifications from the current three-class system (unrestricted, temporarily restricted, and permanently restricted) to two classes: “with donor restrictions” (net assets subject to donor-imposed restrictions) and “without donor restrictions” (not subject to donor-imposed restrictions).
Liquidity and Availability of Resources
New disclosures will be required that communicate how NFPs manage the liquid resources that are available to meet cash needs for general expenditures within one year of the date of the statement of financial position. Quantitative information that communicates the availability of NFPs’ financial assets at the date of the statement of financial position to meet these cash needs should also be provided either on the face of the statement of financial position or in the notes. Qualitative information should be disclosed, as necessary, to convey factors that may affect the availability of a financial asset, such as external or internal limits imposed on those assets.
Reporting Expenses by Nature and Function
All NFPs will be required to present expenses by natural and functional classification in one location. This can be reported on the face of the statement of activities, as a schedule in the notes to the financial statements, or in a separate financial statement. The ASU also provides improved guidance on management and general activities.
NFPs will be required to report investment return net of external and direct internal investment expenses. The disclosure of the amount of expenses netted is no longer required.
The ASU is effective 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 application is permitted. The ASU must be applied on a retrospective basis.
Contact LaPorte’s nonprofit practice professionals to discuss how these and other ASU 2016-14 changes may affect your organization and how we can help you start planning for implementation.