United States: Not-For-Profit Financial Reporting Changes

Last Updated: September 30 2016
Article by Tiffany Cavanaugh

It has been over two decades since the Financial Accounting Standards Board (FASB) last updated the not-for-profit financial reporting model. Over the past couple of years, the FASB has undertaken a project aimed at providing more useful information to donors, grantors, creditors, and other users of a not-for-profit's financial statements about its performance and resources.

On August 18, 2016, the first phase of this project was completed and the FASB issued Accounting Standards Update (ASU) No. 2016-14 – Presentation of Financial Statements of Not-for-Profit Entities. This ASU also impacts health care entities that follow the not-for-profit provisions of Health Care Entities (ASC 954).

Highlights of the main provisions of the ASU are as follows:

Net Assets

In an effort to reduce complexity, the number of net asset classes will be decreased from three to two. Currently, not-for profits are required to report three classifications of net assets – unrestricted, temporarily restricted and permanently restricted. Under the ASU, temporarily restricted and permanently restricted net assets will be combined and reported together as net assets with donor restrictions and unrestricted net assets will be reported as net assets without donor restrictions.

Although certain net asset classes will be combined on the face of the financial statements, enhanced disclosures in the notes to the financial statements will provide useful information about the nature, amounts, and effects of the various types of donor-imposed restrictions and how the restrictions, including those related to both purpose and time, affect the use of resources. These disclosures will be extended to board/self-imposed restrictions.

The ASU also requires the underwater amounts of donor-restricted endowment funds be classified as part of net assets with donor restrictions, and provides for enhanced disclosures about underwater endowments.

Finally, the ASU changes the requirement for reporting expirations of restrictions on gifts of cash and other assets to be used to acquire or construct a long-lived asset. Currently, a not-for-profit can release such donor-imposed restriction over the estimated useful life of the acquired asset. The new ASU eliminates this option and adopts the "placed-in service" approach for reporting such expirations (absent specific donor restrictions stating otherwise).

Cash Flows

Currently, not-for-profits can present the statement of cash flows using either the direct or indirect method. As evidenced by the ASU continuing to allow both methods, the FASB decided to retain such flexibility. The ASU, however, will simplify the presentation for not-for-profits using the direct method, as they will no longer be required to also present or disclose the indirect method.

Expenses

Currently, not-for-profits are required to report expenses by their functional classification. Under the ASU, not-for-profits would also be required to provide the amount of expenses by their natural classification. This analysis of expenses can be presented either on the face of the statement of activities, as a separate statement, or in the notes to the financial statements. In addition, enhanced disclosures are required regarding the method used to allocate costs among program and support functions.

Under the ASU, investment returns will continue to be reported net of investment expenses; however, these are limited to direct internal investment expenses and external investment expenses. The ASU further removes the disclosure of netted expenses, which eliminates certain difficulties and inconsistencies often experienced by not-for-profits in determining the reported amounts of investment expenses.

Liquidity and Availability of Resources

The ASU requires certain enhanced disclosures regarding the liquidity and availability of a not-for-profit's resources. The ASU will require a not-for-profit to provide qualitative information on how it manages its liquid resources in the notes to the financial statements. In addition, quantitative information, either on the face of the financial statements or within the notes, will be required that communicates the availability of a not-for-profit's financial assets at the balance sheet date to meet cash needs for general expenditures within one year of the balance sheet date.

Effective Date

The amendments in this ASU are effective for fiscal years beginning after December 15, 2017, and for interim periods within fiscal years beginning after December 15, 2018. Application to interim financial statements is permitted but not required in the initial year of application. Early adoption is permitted and should be applied on a retrospective basis. However, the not-for-profit can elect to not provide certain comparative disclosures in the year of adoption.

The Next Phase

As previously discussed, the above ASU addresses the first phase of the FASB's not-for-profit financial reporting project. Additional updates to not-for-profit financial reporting are expected as the FASB proceeds with the second phase of the project; stay tuned for more updates.

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.

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