Article contributed by Stephanie Handel, CPA, CFE
For Not-for-Profits, the ASU Brings Welcome Change
On August 18, 2016, the Financial Accounting Standards Board (FASB) released the long-awaited Accounting Standards Update (ASU) 2016-14, Not-for-Profit Entities (Topic 958). The provisions of ASU 2016-14 seek to improve the usefulness of information provided to donors, grantors, creditors and other users of a not-for-profit’s financial statements and reduce complexities for statement preparers and users.
Some of the biggest changes impacted by ASU 2016-14 include the following:
1) Presentation on the face of the Statement of Financial Position amounts for two classes of net assets at the end of the period, rather than for the currently required three classes. A not-for-profit will report amounts for net assets with donor restrictions and net assets without donor restrictions¸ as well as the currently required amount for total net assets.
2) Presentation on the face of the Statement of Activities the amount of the change in each of the two classes of net assets rather than that of the currently required three classes. A not-for-profit would continue to report the currently required amount of the change in total net assets for the period.
3) The Statements of Cash Flows can still be presented using either the indirect or direct method. However, if the direct method is utilized ASU 2016-14 will no longer require a reconciliation to the indirect method.
4) Requires not-for-profits to report investment return net of external and direct internal investment expenses, and no longer requires disclosure of the netted expenses.
5) Requires enhanced footnote disclosures regarding, but not limited to:
a. Amounts and purposes of Board designations, appropriations and similar actions that result in self-imposed limits on the use of resources without donor-imposed restrictions.
b. Composition of net assets with donor restrictions at the end of the period and how the restrictions affect the use of resources.
c. Qualitative information about how the not-for-profit manages its liquid resources available to meet cash needs for general expenditures within one year of the balance sheet date and qualitative information about the availability of a not-for-profit’s financial assets at the balance sheet date to meet cash needs for general expenditures.
d. Amounts of expenses by both natural and functional classification, in one location (either on the face of the Statement of Activities, as a separate statement, or in the notes).
e. Information regarding methods used to allocate costs among program and support functions.
Ramifications of the Update
Clearly one of the biggest changes will be a reduction in the number of classes of net assets that must be reported on the face of the financial statements. FASB’s goal with regard to this change is to reduce complexity, increase understandability, and enable greater use of multi-period comparative financial statements to provide useful information for identifying and assessing key trends.
The amendments in ASU 2016-14 are effective for annual financial statements issued for fiscal years beginning after December 15, 2017, with early application permitted. While not effective for several years, it is never too early to begin assessing the impact these changes will have on your not-for-profit organization.