By Emily Campbell, MPA
Staff, Audit and Assurance Services
Last August the Financial Accounting Standards Board (FASB) released the first major changes to Not-for-Profit financial reporting since 1993. Accounting Standard Update 2016-14 includes significant impact to the look of financials for nonprofits.
If you are in a leadership position or on the board of a not-for-profit, you need to be aware of how this will affect your organization’s financial reporting process. Here are the Top 5 things you need to know about ASB 2016-14:
- Net Assets
ASU 2016-14 changes the net asset class structure from Unrestricted, Temporarily Restricted, and Permanently Restricted to Net Assets without Donor Restrictions and Net Assets with Donor Restrictions. This update removes the distinction between temporarily and permanently restricted net assets in an effort to simplify restrictions. In addition, FASB eliminated the “unrestricted” language to reduce confusion. Not-For-Profit entities will continue to report the change in total net assets for the period. They will also have to report changes in each of the two classes of net assets in their Statement of Activities.
- Expense Presentation
Not-For-Profit entities are now required to break out expenses by both nature and function. This was previously an option under GAAP, but now all entities must do so. The purpose of the update is to show how an entity’s expenses relate to their programs and to make Not-For-Profits more comparable. Additionally, investments are now presented net of investment expenses. Because of this, it will no longer be included in functional expense breakout.
- Statement of Cash Flows
Not-For-Profits may choose to present either the direct or indirect method of Statement of Cash Flows. If the direct method is selected by the entity, it no longer is required to prepare a reconciliation of the change in net assets to net operating cash flows. FASB’s intention was to decrease the burden placed on entities to present the same information in multiple ways. FASB also wanted to increase an entity’s flexibility to present the Statement of Cash Flows using the method that best suits the needs of the entity and its financial statement users.
- Increase in disclosures
Another big change with ASU 2016-14 is the enhanced disclosure requirements. The goal is to improve clarity and transparency in reporting. This includes an increase in net asset disclosures to enrich readers’ understanding of the donor restrictions. There will also be a new requirement to provide quantitative and qualitative information regarding the Not-For-Profit’s liquidity. The entity must communicate the availability of financial assets to meet cash needs for general expenditures for one year after the Statement of Financial Position date.
- Effective Date
ASU 2016-14 is effective for fiscal years beginning after December 15, 2017 and interim periods thereafter. Changes are to be retroactively applied, with options to omit analysis of expenses and disclosures of liquidity in the year of adoption. Early adoption is permitted, so reach out to a trusted financial expert to discuss whether early adoption is best for your Not-For-Profit.
Sponsel CPA Group has expertise in Not-for-Profit financial reporting, and can go over the new rules with you to find the best options for your organization.
If you have any questions regarding ASU 2016-14, please contact Emily Campbell at (317) 613-7873 or email [email protected].