Accounting Standards Update (ASU) No. 2016-14, Presentation of Financial Statements of Not-for-Profit Entities, was released August 18, 2016 by the Financial Accounting Standards Board (FASB), with the ASU effective for annual financial statements issued for fiscal years beginning after December 15, 2017. As previously presented and discussed in our seminars, the changes in this ASU are the first significant changes to not-for-profit entities’ financial statement presentation in more than 20 years.
Changes were considered necessary in order to simplify the face of the financial statements and enhance the disclosures in the notes to the financial statements, providing more relevant information about their resources (and the changes in those resources) to donors, grantors, creditors and other users. In addition to the ASU and the many examples included in the ASU, FASB will make additional educational resources available, which include a “FASB in Focus” fact sheet and a video available here.
A live webcast will be hosted by FASB on September 13, 2016 from noon to 1:15 pm CDT to explore the standard and answer questions submitted by participants. RubinBrown is also hosting seminars to present and discuss further details and examples of the new ASU requirements on September 14, 2016 from 8:00 to 10:00am in St. Louis, on September 27, 2016 from 8:00 to 10:00am in Denver, and on September 28, 2016 from 8:00 to 10:00am in Kansas City. Please follow the links below for details and registration.
The most significant changes within the ASU impact the following areas:
- Net Asset Classes
- Investment Return
- Liquidity and Availability of Resources
- Presentation of Operating Cash Flows
1. Net Asset Classes
- Net assets classification has been reduced from three classes of net assets (unrestricted, temporarily restricted and permanently restricted) two net assets with donor restrictions and net assets without donor restrictions. Required disclosures will still include the composition of net assets with donor restrictions at the end of the period and how the restrictions affect the use of resources.
- Amounts and purposes of governing 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 are also required in the disclosures.
- Underwater endowment funds will now require disclosures of (1) a not-for-profit entity’s policy and any actions taken during the period concerning appropriation from underwater endowment funds, (2) the aggregate fair value of such funds, (3) the aggregate of the original gift amounts (or level required by donor or law) to be maintained and (4) the aggregate amount by which funds are underwater (deficiencies), which are to now be classified as part of net assets with donor restrictions.
- These presentation changes reduce the complexity in financial reporting and increase the understandability of the information provided. Additionally, enhanced disclosures will provide information about the limits placed on net assets by governing boards and donors.
2. Investment Return
- Investment return will be reported net of external and direct internal investment expenses and those netted expenses are no longer required to be disclosed.
- This change will provide a more comparable measure of investment return across all not-for-profits, regardless of whether their investment activities are managed internally or externally. It will also eliminate the difficulties in identifying embedded fees in the investment return of certain investment vehicles and the resulting inconsistencies in the reported amounts of investment expenses.
- Expenses by both their natural classification and their functional classification will 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 to this change in the presentation of expenses, the method used to allocate costs among program and supporting activities functions is required to be disclosed. Examples of the presentation of expenses by both natural and functional classifications, as well as the disclosures for the method of allocation of expenses are provided in the ASU and will be shared at our upcoming seminar.
- These changes will add information useful to donors, grantors, creditors and others in assessing the degree to which a not-for-profit’s expenses are fixed or discretionary, how the related resources are being allocated, and the costs of the services provided.
4. Liquidity and Availability of Resources
- The ASU requires disclosures that communicate qualitative information of how a not-for-profit entity manages its liquid resources available to meet cash needs for general expenditures within one year of the statement of financial position date, as well as quantitative information that communicates the availability of a not-for-profit entity’s financial assets at the statement of financial position date to meet cash needs for general expenditures with one year of the statement of financial position date. The quantitative information can be presented either on the face of the statement of financial position or in the footnote disclosures. Example disclosures are included in the ASU and will be shared at our upcoming seminar.
- These changes will provide more transparent information that will enable financial statement users to have a better understanding of how a not-for-profit entity manages its liquid available resources and its liquidity risks.
5. Presentation of Operating Cash Flows
- Not-for-profit entities can continue to present the statement of cash flows using either the direct method or indirect method. The ASU removes the requirement to present or disclose the indirect method when using the direct method of reporting cash flows.
- This change will allow all not-for-profit entities to retain the current flexibility and freedom in financial reporting, while reducing the costs to entities that present the statement of cash flows using the direct method.
The above changes only impact the presentation and disclosures within the financial statements. However, within the ASU, there is one change in the accounting requirements for not-for-profit entities. The placed-in-service approach will now be required for reporting expirations of restrictions on gifts of cash or other assets to be used to acquire or construct a long-lived asset. The ASU eliminates the current option that, in the absence of explicit donor stipulations, had allowed a not-for-profit entity to delay reporting of an expiration of a donor imposed restriction for the acquisition or construction of a long-lived asset by electing to report the expiration over time (as the asset is used or consumed, i.e. to match the depreciation expense on the asset) rather than when placed in service.
The changes in the ASU should be applied on a retrospective basis in the year that the ASU is first applied. However, if presenting comparative financial statements, a not-for-profit entity has the option to omit the following information for any periods presented before the period of adoption:
- Analysis of expenses by both natural classification and functional classification, if the not-for-profit entity was not previously required to present a statement of functional expenses.
- Disclosures about liquidity and availability of resources.
Early adoption of this ASU is permitted.
This ASU addresses Phase I of the FASB’s overall “Financial Statements of Not-for-Profit Entities” project. Phase II, which includes other proposed changes that are likely to require more time to resolve, will now be reconsidered by FASB. Some of the other proposed changes being considered include:
- Presentation of operating measures on the statement of activities including whether to require intermediate measure(s), whether and how to define such measure(s) and what items should or should not be included in the measure(s) and alternative disaggregation approaches suggested by stakeholders
- Realignment of certain line items on the statement of cash flows, including interest expense, interest and dividends, cash restricted for long-lived assets and purchases of and proceeds from sales of long-lived assets
Please register for our upcoming seminars below to learn more about the new requirements and see example presentation changes and disclosures.
Exploring ASU 2016-14, Presentation of Financial Statements of Not-for-Profit Entities
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