In our blog series, New Financial Reporting Standards for Nonprofits we provided specifics about the FASB’s major reporting changes under Accounting Standards Update (ASU) 2016-14. These changes will play a notable role in how your organization prepares its financial statements and how lenders, potential donors, charity watch dog organizations and your board members view the organization’s financial health through its financial statements. With implementation of the new standards literally around the corner, we thought it would make sense to provide a reminder of the ASU’s requirements.

Below is an overview of the changes

• Disclosures about liquidity- There are now two components of the liquidity disclosures-

1. The nonprofit must disclose how the organization ensures that it will have the funds to support its operating expenses (qualitative), and
2. The nonprofit must show the amount of financial assets available for general expenditures (quantitative). Of the changes required by the ASU, the disclosures about liquidity are arguably the most relevant change in that this requirement will have the impact on how readers of the organization’s financial statements understand the financial health of the organization. In summary, does the organization have sufficient financial resources to meet its operating needs in the next twelve months?

• Changes to net asset classes- There are now 2 net asset classes, rather than 3, which are as follows:- “with donor restrictions” and “without donor restrictions”. The purpose of this change is to make the financial statements more user friendly and transparent to the reader. The current unrestricted, temporarily restricted and permanently restricted language was considered confusing to the reader. In addition, board designated funds must be disclosed both in connection with their amounts, their purposes and their access. For example, if your NFP has a liquidity reserve fund you would need to include in your financial reports a statement such as, “The nonprofit has $# of funds designated by the board for emergencies, this fund can be accessed through majority board approval.”
• Investment returns and treatment of investment expenses- The ASU stipulates that external and direct internal investment expenses are netted with investment return in the statement of activities, and eliminates the requirement to disclose the components of investment return. In addition, the FASB expanded the types of expenses that can be considered investment expenses.
• Classification of expenses- All nonprofits will now have to show expenses by function and by natural classification. In addition, the new guidance requires qualitative disclosures about methods used to allocate costs between program and support functions. This is a good time to review your cost allocation methodologies.
• Statement of cash flows- On the statement of cash flows, nonprofit organizations currently have the option to use either the direct method or indirect method to present the cash flow statement. Although the direct method is favored by the FASB, current guidance requires the reporting entity must include the indirect reconciliation when the direct method is used. The new ASU eliminates the indirect reconciliation requirement.

When are these changes effective?

The changes were first introduced in 2016 and are effective for fiscal years beginning after December 15^th, 2017. Is your organization ready? Questions? Contact any member of our Not-for-Profit Services Team.

To learn more register for our upcoming webinar on December 4th: Are You Prepared for the Latest Nonprofit Financial Reporting Standards? REGISTER NOW