Not-For-Profits ( NFP ) Accounting Changes – Are You Ready?
Since 1993, targeted financial reporting standards for Not-For-Profit (“NFP”) organizations have been relatively unchanged. However, FASB’s soon to be effective ASU 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial statements of Not-for-Profit Entities (“amendments”), contains significant targeted changes and enhancements to the NFP financial reporting model.
These amendments change the presentation and disclosure requirements (qualitatively and quantitatively) for several NFP areas such as: (i) reduction in net asset classes (ii) reporting on functional expenses (iii) disclosure of liquidity, flexibility and availability of financial resources, and (iv) several other areas. Transparency, disaggregation, modernization and understanding liquidity were the underlying themes for these changes.
A brief summary of these amendments are as follows:
Reduction in net asset classes – NFPs will reduce the current three classes of net assets (permanently restricted, temporarily restricted, and unrestricted) throughout their financial statements and footnotes, to two classes, that being – net assets with donor restrictions, and net assets without donor restrictions. This action was taken to simplify disclosure and to conform to changing laws particularly since the classification of temporarily restricted net assets has long been an area of confusion.
NFPs will still need track net assets and disclose restrictions imposed by donors. FASB added a new requirement to disclose board (or management) designations on net assets without donor restrictions; this disclosure was previously optional but will now be mandatory.
Reporting on functional expenses – All NFPs will now report functional expenses by both their functional and natural classifications. Additionally, the methodologies utilized to allocate joint costs also are required to be disclosed in a disaggregated manner; such allocations are to be applied in a reasonable, consistent and verifiable basis.
Disclosure of Liquidity, flexibility and availability of financial resources – Users had difficulties evaluating the liquidity of a NFP. FASB reacted by including disclosure enhancements in the amendments. These new disclosures include:
- Ordering the statement of financial position (from top to bottom) by the nearness an asset is converted into cash or the nearness when a liability requires cash to be settled.
- Qualitative and quantitative disaggregated information that communicates the availability of the NFP’s financial assets (at its year end date) to meet cash needs for general expenditures within one year of that year-end date. The impact to this availability is also required to be disclosed by: external limits imposed by donor restrictions, internal limits imposed by management or the governing board, and contractual or other limits imposed.
- Encouragement to provide classified statement of financial position (required for health care type NFPs).
- How the NFP manages its financial resources and expectations throughout the year after the reporting year end.
- Any other relevant information impacting liquidity for this period. It is noted that these analysis disclosures are in addition to the normal going concern criteria a NFP needs to comply with.
Other areas affected by the amendments include:
- On the presentation of the statement of cash flows, allows for a choice between the direct and indirect method of reporting operating cash flows; presentation of the indirect reconciliation is no longer required if using the direct method.
- Updates the disclosures for self-imposed restrictions on the use of financial and non-financial resources.
- Enhances disclosures for the composition of net assets with donor restrictions.
- Amends endowment and split-interest disclosures as well as enhancing those for underwater endowment funds.
- Requires investment income to be reported, in a disaggregated manner, net of related internal and external investment expenses (this is currently optional), but also eliminates the related requirement to disclose the amount of embedded investment fees in the investment returns from mutual funds and hedge funds.
These amendments will be effective for all fiscal years beginning after December 15, 2017. For calendar year organizations, that will be calendar 2018.
This new ASU marks the completion of the first phase of a larger project aimed at improving NFP financial reporting. FASB deferred the issue of disclosing operating measures to what it calls Phase Two of the project.
There are other components of literature that will impact NFPs soon, including, revenue recognition, financial instruments, leasing, and more.
Call or contact Eric Lerner for information on information you may need on NFPs.