Have you been looking to improve the face of your nonprofit organization’s financial statements and enhance footnote disclosures to better communicate financial performance? If so, in August 2016 the Financial Accounting Standards Board (FASB) issued a new accounting standards update (ASU) regarding accounting and reporting for nonprofits, known as ASU 2016-14. This update marks one of the biggest changes in accounting and reporting for the face of the financials of nonprofit organizations.
A summary of the changes included in this update, are as follows:
- Net Asset Classification: The new FASB ruling requires that nonprofits report under two net asset classifications in the Statement of Financial Position and Statement of Activities: Unrestricted Net Assets and Donor Restricted Net Assets, rather than three net asset classifications: Unrestricted, Temporarily Restricted, and Permanently Restricted. Additionally, assets marked with a specific purpose will be classified as Board Designated Net Assets.
- Underwater Endowments: Investments that have a current fair value that is less than the original gift amount or amount required to be held by donor, or by law, are considered to be “underwater”. These assets will now be classified as “net assets with donor restrictions”.
- Statement of Cash Flow Preparation: Organizations may elect to use either the Direct Method or Indirect Method of presenting the Statement of Cash Flows, but now when using the direct method the presentation or disclosure of the indirect method (reconciliation) is no longer also required.
- Enhanced Disclosures: There are a handful of new footnote disclosures and changes to footnote disclosures that are related to a wide array of topics such as:
a. Self-imposed and donor-imposed restrictions,
b. Qualitative and quantitative information about management of liquid resources,
c. Expenses detailed out by natural classifications and functional classifications,
d. Methods used to allocate costs among programs and support functions.
- Investment Return: Investment returns are to be reported net of external and direct internal investment expenses. The FASB will no longer require disclosure of these netted expenses.
- Placed-in-Service Approach: The FASB, in the absence of explicit donor stipulations, dictates the use of a “placed-in-service” approach for reporting expirations of restrictions on gifts of long-lived assets (or cash to acquire long-lived assets). This eliminates the current option to release restrictions over the estimated useful life of the acquired asset.
Each update is to improve the overall presentation of an organization’s financials. As well, we note that these updates will be beneficial to donors, grantors, creditors, and other users of the financials for Not-for-Profit organizations.
Nonprofit organizations are required to adopt these changes for fiscal years beginning after December 15, 2017, and for interim periods within fiscal years beginning after December 15, 2018. However, we note that early adoption is permitted and recommended. Amendments should also be applied on a retrospective basis in the year that the updates are first applied.
For your organization, it is particularly important to understand these new updates and changes as it provides users of financial statements more useful information while reducing the complexities for your organization and its audience. If you have any questions regarding this, or any other tax matters, please do not hesitate to contact our office at (858) 558-9200.