On Aug. 18, 2016, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2016-14: ‘Not-for-Profit Entities (Topic 958) and Health Care Entities (Topic 954) – Presentation of Financial Statements of Not-for-Profit Entities,” with the goal of improving the presentation of the financial statements for not-for-profit entities. This guidance has been much anticipated and is the first major change to the financial statement model in more than 20 years. The ASU impacts many different matters with the most significant being related to the presentation of net asset classes, investment returns, expenses, the presentation of operating cash flows and liquidity disclosures. Below is the general impact of these areas.
Net asset classes
Currently, generally accepted accounting principles (GAAP) requires three classes of net assets to be presented (unrestricted, temporarily restricted, and permanently restricted) and the new ASU would now require only two classes to be presented (net assets with donor restrictions and net assets without donor restrictions). With permanently restricted net assets no longer being specifically broken out, the classification of underwater amounts of donor-restricted endowment funds will be included in net assets with donor restrictions but enhanced disclosures related to the underwater endowment funds are required. Many of the disclosures related to donor-imposed restrictions are still required. However, the ASU will now require new disclosures for the amounts without donor restrictions, specifically amount, purpose and type of any board designation.
With the ASU, entities will now report investment returns net of any external and internal investment expenses as compared to current GAAP that requires net investment expenses to be disclosed. This change will allow a better comparison of investment returns among all not-for-profit entities, regardless of how the investments are managed or the composition of the portfolio.
Under the current standards, not-for-profit entities must present expenses by function. The ASU introduces a requirement to present expenses by nature and function, as well as an analysis of these expenses in one location to help users assess how an entity uses its resources. This analysis can be presented on the face of the statement of activities, as a separate statement, or in the notes to the financial statements. Additionally, the method used to allocate costs between program and support services is required to be disclosed.
Presentation of operating cash flows
The ASU continues to allow not-for-profit entities to present their statement of cash flows using the direct or indirect method but eliminates the requirement to present a reconciliation of changes in net assets to cash provided to (used in) operating activities if the direct method is used.
Arguably the most significant change with ASU 2016-14 surrounds the requirements to disclose various liquidity information. To provide more transparent information that will enable financial statement users to have a better understanding of how an organization manages its risks, the ASU requires specific disclosures. The new disclosures will require an entity to include qualitative and quantitative liquidity information including how an entity manages its liquid available resources to meet cash needs for general expenditures within one year of the balance sheet date and availability of financial assets at the balance sheet date to meet those same expectations.
When does this affect your entity?
The ASU is effective for fiscal years beginning after Dec. 15, 2017 and for interim periods beginning after Dec. 15, 2018 with early adoption being permitted. If your entity presents comparative financial information, the ASU must be applied retrospectively.
ASU 2016-14 brings many beneficial changes to most not-for-profits, as well as donors, grantors, creditors and others that use the financial statements. A great starting point is to review the ASU on the FASB website and if you have any questions, we would love to help!
Jason Redman, CPA is a manager at Mengel, Metzger, Barr & Co. LLP. He may be reached at JRedman@mmb-co.com.