Recently the men and women at the Financial Accounting Standards Board (FASB) have been busy providing accountants with no shortage of nighttime reading. In the middle of putting the accounting world on its head with the release of the new Revenue Recognition (Topic 606) and Lease (Topic 842) Accounting Standards, the Not-For-Profit Advisory Committee has been hard at work re-tooling the way nonprofits will have to present their financial statements.
On April 22, 2015 the FASB issued its exposure draft of a proposed Accounting Standards Update (ASU), Presentation of Financial Statements of Not-for-Profit Entities. The final revisions were made in June 2016 and the final ASU is expected to be released to the public later this year.* The ultimate goal of this ASU was to improve, not overhaul, the current reporting model. The changes are intended to provide the financial statement users with more comparable information across all nonprofit organizations and to allow for more transparency in telling their story through their financial statements. FASB Board Member, Larry Smith, was quoted as saying, “these changes will refresh the [reporting] model in ways that will make not-for-profit financial statements even more useful to donors, lenders, and other users.”
Here is a summary of the significant changes:
- The three existing net asset classifications (unrestricted, temporarily restricted, and permanently restricted) will be combined into two new classifications (without donor restrictions and with donor restrictions), that the FASB believes will be more easily understood by all parties.
- Endowments that are underwater will be presented in the new “with donor restrictions” net asset category rather than in the “without donor restrictions” or unrestricted category as they currently are presented. Along with this change are additional disclosure requirements to add transparency for the reader.
- Liquidity disclosure requirement to disclose both qualitative and quantitative factors impacting the organization’s liquidity. The disclosures include information about how the organization manages its liquid resources, including the availability of such resources and how they will be used to meet the organizations general expenditure needs, and how it manages its liquidity risk.
- Report expenses either on the face of the financial statements or in the notes, by both their functional class and natural classification (currently only required for health and welfare organizations). The organization must also disclose the methods used to allocate costs among program and support services.
- Investment expenses can now be netted against investment returns on the face of the financial statements. Because of the difficulty to accurately identify all investment related costs, especially those imbedded in mutual fund transactions, the FASB has eliminated the requirement to separately report investment expenses.
- Improved disclosures for those organizations that use a self-defined operating measure, especially those whose operating measure is related to Board appropriations or designations. (The final ASU is expected to have illustrative examples)
- Release of restriction related to long-lived assets is now required to be reflected at the placed-in-service date. This eliminates the option that is currently available to release the donor restriction over the estimated useful life of the asset.
- Eliminate the requirement to perform the indirect reconciliation of operating cash flows if preparing the direct method cash flow statement.
The effective date for implementation is for fiscal years beginning after December 15, 2017 (calendar years ending December 31, 2018 and June fiscal years ending June 30, 2019) and early adoption is permitted.
*On August 18th the FASB issued Accounting Standards Update (ASU) No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities.