More than a year after the proposed changes were presented in an exposure draft in 2015, the Financial Accounting Standards Board (FASB) issued the final Accounting Standards Update (ASU) 2016-14, Not-for-Profit Entities (Topic 958) – Presentation of Financial Statements of Not-For-Profit Entities. Throughout the process, the FASB garnered feedback and issued updates, and the final ASU reflects the revisions made during this time.
ASU 2016-14 is the first major change to authoritative guidance for not-for-profit entities (NFPs) since the FASB issued Statement No. 117 in 1993. A second, more-detailed phase is expected in the future, in which additional issues will be discussed in more detail.
The goals of this phase of the process were to improve the usefulness of the information presented in the financial statements and/or reduce the complexities and costs for preparers and users of the financial statements.
The main provisions in the Update address and improve several areas in financial reporting for NFPs. This ASU makes changes in the following areas:
Eliminating Distinctions in Classification of Net Assets
- The existing three classes of net assets (unrestricted, temporarily restricted, and permanently restricted) are replaced with two new classes (with donor restrictions, and without donor restrictions)
- Current requirements to present information about the nature of amounts of different types of donor-imposed restrictions are unchanged; NFPs can continue to use either the direct or indirect method of reporting, but are no longer required to present reconciliation if using the direct method
Enhanced Disclosures in Notes to Financial Statements
Additional disclosure requirements have been added in several areas:
- Composition of net assets with donor restrictions, and how those restrictions may affect the use of resources
- Qualitative and quantitative information required to communicate information regarding:
Management of liquid resources and liquidity risk to meet cash needs within
one year of balance sheet date
Availability of assets to meet cash needs within one year of balance sheet date,
and how any limitations on the assets are handled
- Analysis and presentation of expenses by nature and function, provided in single location
- Methods used for allocation of costs
- Numerous provisions related to underwater endowment funds
Simplifying the Presentation of Information
- Investment return must be reported net of external and direct internal investment expenses; prior requirement for disclosure of netted expenses is eliminated
- Operating cash flows can be reported on statement of cash flows using the direct or indirect method; if direct method is used, reconciliation to indirect method is no longer required
- Expiring restrictions on capital gifts should be reported using the placed-in-service approach (if not prohibited by donor stipulations); use of estimated-useful-life approach is eliminated
ASU 2016-14 is effective for annual financial statements for fiscal years beginning after December 15, 2017, and for interim periods within fiscal years beginning after December 15, 2018. Early application is permitted. It is important for NFPs to determine what additional information will be needed as early as possible to aid in the transition.
Though the initial compliance process will create some additional burden and necessitate adjustments from NFPs, the organizations will ultimately benefit from a process that is more consistent and transparent. The changes should result in financial statements that allow users to better understand and compare the financial positions of not-for-profit organizations.
Please contact Megan Troxell at 412-338-9300 if your organization has questions or needs assistance with this process.