In August 2016, the FASB issued ASU No. 2016-14 Not-for-Profit Entities (Topic 958) Presentation of Financial Statements of Not-for-Profit Entities (ASU). The ASU is Phase I of the FASB project to update the financial statement presentation and disclosures for not-for-profit entities. It’s intended to improve the current net asset classification and the information presented in the notes about a not-for-profit’s liquidity, financial performance, and cash flows. The changes are expected to improve the usefulness of information provided to financial statement users and/or reduce complexities or costs for preparers or users of the financial statements.
Key Provisions You Need to Know
The key provisions relate to improved reporting and disclosure of:
- Net asset classes
- Expenses and investment return
- Operating measures
- Liquidity and availability of resources
- Statement of cash flows
Net asset classes
On the face of the statement of financial position and statement of activities, a not-for-profit is required to present two classes of net assets: net assets with donor restrictions and net assets without donor restrictions. This replaces the currently required three classes of net assets.
Liquidity and availability of resources
A not-for-profit will now be required to provide qualitative information on how it manages its liquid resources and liquidity risk. It must also provide quantitative information on the availability of assets at the balance sheet date to meet cash needs for general expenditures within one year. Availability of financial assets may be affected by the nature of the asset; external limits imposed by donors, grantors, laws, and contracts with others; and internal limits imposed by governing board decisions.
Reporting of expenses will now be required by function and natural classification either on the face of the financial statements, as a separate statement, or in the notes to financial statements. Currently, expenses are required to be reported only by function. In addition, qualitative disclosures about the methods used to allocate those expenses among program and support functions will now be required.
Investment return will now be presented as net of investment expenses on the face of financial statements, so long as the expenses are external or direct internal expenses.
The ASU reinforces the current GAAP requirement for not-for-profits that use an operating measure to provide enhanced disclosures regarding internal board designations, appropriations, and similar actions affecting that measure.
Statement of cash flows
A not-for-profit is allowed to continue to present the statement of cash flows using either the direct or indirect method of reporting but is no longer required to present or disclose the indirect method (reconciliation) if using the direct method.
Not-for-profits will also now be required to disclose the amounts and purposes of board-designated net assets. In addition, disclosures about “underwater” (deficient) endowment funds will be required, including the not-for-profit’s policy and any actions taken concerning appropriation from underwater endowment funds, the aggregate fair value of such funds, the aggregate of the original gift amounts to be maintained, and the aggregate amount by which funds are underwater.
The accumulated losses related to the underwater endowment funds will now be classified as part of net assets with donor restrictions, instead of the current classification in unrestricted net assets. The ASU also requires gifts of cash restricted for acquisition or construction of property, plant, and equipment to be reported using the placed-in-service approach and no longer allows the implied time restriction approach.
This ASU 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 and should be applied retrospectively, except when preparing comparative financial statements. In that case, the not-for-profit has the option to omit for any previous period the analysis of expenses by both natural and functional classification and disclosures about liquidity and availability of resources.
On the Horizon
The FASB is currently working on Phase II of the project, which will address the following:
- Whether to require a measure of operations
- How to define a measure of operations
- Potential realignment within the statement of cash flows
- Segment reporting for not-for-profit health care entities