By Siena Rambo and Tyler Williams
With the release of Accounting Standards Update (ASU) 2016-14 Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities by the Financial Accounting Standards Board (FASB), some significant changes will be made to nonprofit financial statements as we know them now.
One of those changes is going from three classes of net assets (unrestricted, temporarily restricted, and permanently restricted) to two classes: net assets with donor restrictions and net assets without donor restrictions. However, there will be disclosures required about the type of restrictions those net assets have at the end of the reporting period, so it will still be necessary to track net assets by type of restrictions even though it is shown as one line (net assets with donor restrictions) on the statement of financial position.
Another change is reporting of expenses. Currently, expenses are required to be disclosed by functional classification (e.g. program services, management/general and fundraising). With the implementation of the new standard, the natural classification (e.g. salaries/wages, professional services, office expenses) must also be disclosed for all nonprofits, not just health and welfare entities). Including this information as supplementary information will not fulfill the requirement; it must be provided in one location, which could be on the face of the statement of activities, as a separate statement, or in notes to financial statements (the FASB believes that the analysis would likely be included in the notes).
The addition of both qualitative and quantitative disclosures about liquidity is another significant change. The disclosures include the actual availability of finance assets to meet cash needs within 1 year of the balance sheet date and the way the nonprofit manages its liquid resources available in order to meet those cash needs.
Other changes include the option to use the either the direct or indirect method for cash flow statements, required disclosures related to underwater endowments and reporting of investment expenses.
The standard is effective for reporting periods beginning after December 15, 2017 (or for year ended December 31, 2018) with early implementation allowed. In the year of adoption, all provisions should be applied retrospectively. However, for comparative financial statements, nonprofits can opt out of applying the analysis of expenses by both natural and functional classification and the liquidity disclosures for the periods presented before the period of adoption.
It will be important to keep these changes in mind when it comes time to present year-end financial statements to the board of directors, as some areas of the report will look much different than they have in the past. Also, now would be a good time to evaluate existing policies concerning board designations and underwater endowments, or implement new policies if your organization currently lacks a policy addressing board designations and underwater endowments.
Blackburn, Childers & Steagall will be presenting a nonprofit roundtable on May 17 at MeadowView in Kingsport which will include discussion on these changes to nonprofit reporting. More information is on our website at https://www.bcscpa.com/events/2018-accounting-update-cpe/
For those who would like to read the actual standard as issued by FASB, you can find it at this link: https://asc.fasb.org/imageRoot/56/92564756.pdf