On August 18, 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2016-14 (ASU 2016-14) on Presentation of Financial Statements of Not-for-Profit Entities. ASU 2016-14 (the Update) represents the most significant changes to not-for-profit financial reporting since 1993.
In general, the goal of the Update is to provide more transparent information that will enable financial statement users to better assess an organization's liquidity and financial flexibility. The Update includes the following main provisions:
Net Assets
The Update replaces the existing three classes of net assets (unrestricted, temporarily restricted and permanently restricted) with two new classes: Net assets with donor restrictions and net assets without donor restrictions.
Functional Expenses
The Update requires the reporting of expenses by both their natural and functional classifications, either on the face of the statement of activities, as a separate statement, or in the notes. The Update also enhances the disclosure of the method used to allocate costs among functions.
Statement of Cash Flows
For organizations that choose to use the direct method of reporting, the Update eliminates the requirement to also present a reconciliation under the indirect method of reporting.
Enhanced Disclosures
- Amounts and purposes of board designations, appropriations and similar actions that result in self-imposed limits on the use of resources without donor-imposed restrictions as of the end of the period.
- Composition of net assets with donor restrictions at the end of the period and how the restrictions affect the use of resources.
- Qualitative information on how an organization manages its liquid resources available to meet cash needs for general expenditures within one year of the end of the period.
- Quantitative information, either on the face of the statement of financial position or in the notes, that communicates the availability of an organization's assets at the end of the period to meet cash needs for general expenditures within one year of the end of the period.
Underwater Endowment Funds
Changes the classification to now be reported under net assets with donor restrictions along with expanded disclosures.
Investment Income
To be reported net of external and direct internal investment expenses and no longer require the disclosure of the netted expenses.
Gifts To Be Used to Acquire or Construct a Long-Lived Asset
In the absence of explicit donor stipulations, organizations are to use the placed-in-service approach for reporting expirations of restrictions on gifts of cash or other assets to be used to acquire or construct a long-lived asset (eliminating the current option to release the donor-imposed restriction over the estimated useful life of the acquired asset).
The amendments in this Update are effective for annual financial statements issued for fiscal years beginning after December 15, 2017. Early application of the amendments in the Update is permitted.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.