In late 2016 the FASB released their long-awaited ASU specifically impacting the way nonprofits present their financial information. While the new standard sets forth positive improvements for the presentation of nonprofit financial statements, the resulting changes require nonprofits and their financial teams to revisit their current operational measures and reporting procedures. Consider the following areas as you begin to implement ASU 2016-14.
Nonprofits have been able to classify assets as unrestricted, temporarily restricted and permanently restricted. But temporarily and permanently restricted net assets will be combined into “net assets with donor restrictions,” and unrestricted net assets will be characterized as “net assets without donor restrictions.”
Your nonprofit will also need to disclose the amount and purpose of board-designated net assets. And, the amount by which endowment funds are underwater will be a component of net assets with donor restrictions rather than net assets without restrictions.
Currently, nonprofits can recognize the expiration of a donor restriction over time. But under the new rules, you’ll need to reclassify net assets with donor restrictions that are used to acquire or construct long-lived assets as “net assets without donor restrictions” when the asset is placed into service.
Your nonprofit will be required to disclose expenses by both function (for example, programs and supporting activities) and natural classification (such as salary, depreciation and professional fees). These can be reported either as a statement in the financial statements or in the notes.
You’ll need to present investment returns net of external investment expenses and the salary and benefits of certain employees directly involved in investment management. It will no longer be necessary to disclose investment expenses and details of investment components in the endowment net assets roll-forward in the notes.
Liquidity and Availability
The rule change calls for “enhanced” qualitative and quantitative reporting on spendable financial resources within the footnote. A table will need to be disclosed to present the financial assets available to meet cash needs for general expenditures within 12 months following the balance sheet date.
If you report an operating measure in your statement of activities and report decisions your Board has made (such as designating or appropriating earnings), you’ll need to describe in detail how such Board decisions have affected your statement of activities.
You’ll still be allowed to use either the direct or indirect (reconciliation) method of reporting cash flows. If you choose the direct method, you’ll no longer be required to provide indirect reconciliation.
Only Phase 1
These targeted changes represent only Phase 1 of the FASB’s nonprofit accounting rules revision. Based in part on comments the FASB received from nonprofits about its original proposal, the Board has pledged to keep nonprofit accounting rules in sync with those of for-profit entities.
Phase 2, therefore, will consist of broader, more fundamental changes that reflect revisions to the private and public business reporting models. That said, the FASB has also stated that it wants to continue to provide nonprofits with reporting flexibility. Contact MFA’s Nonprofit Team for more details on how the new nonprofit accounting guidelines will affect your organization.