FASB issued an accounting standard update related to the presentation of financial statements of not-for-profit entities. There are several changes that will impact reporting and what is required to be included in financial statements of not-for-profits (NFP).

What does this mean for you?

The major changes include:

• New titles for net assets,
• Requirement for all NFP’s to include functional expense schedule,
• Netted investment expenses are not required to be presented,
• Several new required disclosures.

Net assets will no longer be presented in three categories of unrestricted, temporarily restricted, and permanently restricted. The update will require NFP’s to report only two net asset categories: net assets with donor restrictions and net assets without donor restrictions.

All NFP’s will be required to report the natural classification as well as the functional classification for expenses. This can be included in the statement of activities, statement of functional expenses, or in a disclosure in the financial statements. Previously, only voluntary health and welfare entities were required to report functional expenses and it was recommended for other types of NFPs but not required. This may cause your Organization significant reporting difficulties if you do not plan ahead.

Investment returns are to be reported net of external and direct internal expenses. These expenses are not required to be presented on the face of the statement of activities or in financial statement disclosures.

The following is a summary of the new required disclosures:

• Amounts and purposes of governing board designations, appropriations, and similar actions that result in self-imposed limits on use of resources.
• Composition of net assets with donor restrictions at the end of the period and how the restrictions affect the use of resources.
• Qualitative information that communicates how an NFP manages its liquid resources available to meet cash needs for general expenditures within one year of the statement of net assets reporting date.
• Quantitative information, either on the face of the statement of net assets or in the footnotes, and additional qualitative information in the footnotes as necessary, that communicates the availability of an NFP’s financial assets at the statement of net assets reporting date to meet cash needs for general expenditures within one year of the reporting date. Availability of a financial asset may be affected by:
• its nature,
• external limits imposed by donors, grantors, laws, and contracts with others, and
• internal limits imposed by governing board decisions.
• Method of allocating costs among program and support functions.
• Underwater endowment funds, if any.

When will this to into effect?

ASU 2016-14 is effective for annual financial statements issued for fiscal years beginning after December 15, 2017 and interim periods beginning after December 15, 2018.

Early adoption is permitted.

What if you report comparative financial statements, do you now need to provide all information for the year before implementation as well?

If you are reporting comparative financial statements in the first year applied, you can omit:
• Analysis of expenses by natural classification and functional classification.
• Disclosures about liquidity and availability of resources.

Why was this change made?

These changes are going to improve the usefulness of information provided to users of the financial statements and reduce some of the complexities and costs for those preparers of the financial statements. In essence this should help NFP’s report more useful information about their resources and any changes to those resources. The face of the financial statements will be simplified but disclosures will provide more descriptive narratives and data to users than in the previous guidance.

Questions?

These changes mark significant changes to the reporting process for many not-for-profit organizations. If you would like to discuss these changes and how these changes may effect your Organization,

please call Jessica Smith at (203) 972-5191.