After nearly five years of research and extensive outreach efforts, including consideration of more than 260 comment letters on its 2015 Exposure Draft, the Financial Accounting Standards Board (FASB) has issued the first of its anticipated amendments impacting accounting and reporting across the not-for-profit sector. Issued in August 2016, Accounting Standards Update (ASU) No. 2016-14 Not-for-Profit Entities (Topic 958) Presentation of Financial Statements of Not-for-Profit Entities aims to streamline and improve financial reporting for not-for-profit entities, and assist not-for-profits in more effectively “telling their story” through an enhanced and more relevant disclosure process.
Affecting charities, foundations, colleges and universities, health care providers, religious organizations, trade associations, and cultural institutions, among others, the main provisions of ASU 2016-14 include the following:
Net asset classification changes – New guidance replaces the existing three classes of net assets (unrestricted, temporarily restricted and permanently restricted) with two new classes of net assets (net assets with donor restrictions and net assets without donor restrictions), within the Statement of Financial Position and the presentation of changes in net assets on the Statement of Activities.
Reclassification of “underwater” endowments – To increase conformity with recently-enacted versions of the Uniform Prudent Management of Institutional Funds Act, ASU 2016-14 requires reclassification of “underwater” endowment amounts from net assets without donor restrictions (currently unrestricted) to net assets with donor restrictions, and requires enhanced disclosures for underwater endowment funds, including:
- Aggregate amounts by which funds are underwater (current GAAP);
- Aggregate of original gift amounts (or level required by donor or law) of such funds;
- Aggregate fair value of such funds;
- Any governing board policy or decision to reduce or not spend from such funds.
Placed-in-service approach – In the absence of explicit donor stipulations, ASU 2016-14 now specifies the use of the placed-in-service approach for reporting expirations of restrictions on capital gifts (gifts of cash or other assets to be used to acquire or construct a long-lived asset), and reclassification of any amounts from net assets with donor restrictions to net assets without donor restrictions, for such long-lived assets that have been placed in service as of the beginning of the period of adoption. This provision effectively eliminates the current option to release the restrictions over the estimated useful life of the acquired asset (over-time approach).
Cash Flow presentation – While continuing to allow not-for-profits the option to present the net amount of operating cash flows using either the direct or indirect method of reporting, ASU 2016-14 eliminates the requirement to reconcile the change in net assets to net cash flow from operating activities using the indirect method (reconciliation) if a not-for-profit uses the direct method of reporting.
Functional allocation of expenses – New guidance now requires all not-for-profit organizations to report expenses by both their natural and functional classification, although allowing for flexibility in the method of presentation. Eliminating the separate Statement of Functional Expenses requirement originally imposed on Voluntary Health and Welfare Entities, all not-for-profits now have the option to provide a functional expense analysis on the face of the Statement of Activities, as a separate statement, or in the notes to the financial statements. Not-for-profit organizations are also now required to provide a qualitative description of the methods used to allocate costs among functional areas. To assist in this process, FASB has refined its definition of management and general activities, and included additional illustrative guidance within the new standard to better depict which types of costs should be allocated among program and/or support functions.
Investment return and expenses – ASU 2016-14 also provides for new reporting requirements related to investment return. All not-for-profits are now required to present investment return, net of external and direct internal investment expenses, on the Statement of Activities. Further, the new standard eliminates the currently required disclosures related to (1) components of investment income, (2) total performance of other investment portfolios (required of institutions of higher education), and (3) netted investment expenses, with the exception of internal salaries and benefits which now require disclosure.
Enhanced disclosures –
Board designations and self-imposed limits – In addition to information regarding the composition of net assets with donor-imposed restrictions at the end of the period, ASU 2016-14 requires enhanced disclosures regarding amounts and purposes of self-imposed limits on the use of resources without donor-imposed restrictions as of the end of the period. These include information on governing board designations, appropriations, and other similar actions.
Liquidity and liquidity risk – New disclosures directed at improving a financial statement reader’s ability to assess the not-for-profit’s available financial resources, as well as its management of liquidity and liquidity risk, are now required and include:
- Qualitative information (descriptive information) that conveys how a not-for-profit manages its liquid resources available to meet cash needs for general expenditures within one year of the Statement of Financial Position date; and
- Quantitative information (measurable information) either on the face of the balance sheet or in the notes (and additional qualitative information in the notes as necessary), that illustrates the availability of a not-for-profit’s financial assets at the Statement of Financial Position date to meet cash needs for general expenditures within one year of the Statement of Financial Position date. Availability of a financial asset may be affected by any of the following: (1) its nature, (2) external limits imposed by donors, grantors, laws, and contracts with others, and (3) internal limits imposed by governing board decisions.
The amendments in ASU 2016-14 are effective for fiscal years beginning after Dec. 15, 2017 (effective calendar year 2018 for Dec. 31 year ends), and for interim periods within fiscal years beginning after Dec. 15, 2018, with early adoption permitted. Amendments should be applied on a retrospective basis in the year that the update is first applied, and include disclosure regarding the nature of any reclassifications or restatements and their effects, if any, on changes in the net asset classes for each period presented. If presenting comparative financial statements, not-for-profits may opt to omit the analysis of functional expenses and disclosures about liquidity and availability of resources for any periods presented before the period of adoption, unless such information previously required presentation.