mission Matters New Financial Reporting Standards for Nonprofits: New Net Asset Classes May 05, 2017 Under the new financial reporting standards for nonprofit organizations, the FASB has condensed the three current net asset classes into two—find out how this will help you. The Financial Accounting Standards Board (FASB) issued new financial reporting standards for nonprofits under Accounting Standards Update (ASU) 2016-14 which will affect all nonprofit organizations. The long awaited changes to net assets are probably the most notable change concerns the condensed number of net asset classes. Net asset classification before the update? There are currently three net asset classes: Unrestricted- These are assets not subject to donor-imposed restrictions. Temporarily restricted- These are net assets whose use is restricted by donor-imposed restrictions that will either expire with the passage of time or be fulfilled by actions of the organization. Permanently restricted- These are gifts subject to donor-imposed restrictions in perpetuity often times these gifts are in the form of an endowment. Net asset classification after the update As a result of the new standard, the three existing classes of net assets will now become two: 1. Net assets without donor restrictions 2. Net assets with donor restrictions Unrestricted net assets will now be labeled “net assets without donor restrictions” and temporarily and permanently restricted net assets will be combined into one class labeled “net assets with donor restrictions”. Why the change? There were certain confusions with the “unrestricted” net asset classification, because organizations were puzzled as to whether the class represented liquid resources available. The updates provide more clarification on how restrictions or limits imposed by donors, grantors, laws, contracts, and governing boards affect an entity’s liquidity and financial performance. The footnote disclosure will continue to disclose an analysis of time purpose and perpetual restrictions of the net assets. Enhanced board disclosures The requirement to disclose the nature and amounts of donor restrictions on net assets with donor restrictions still remains. Additionally, the FASB is adding a new requirement to disclose board designations on net assets without donor restrictions. This will now be a mandatory disclosure, as opposed to previous guidance which held that it was optional. ASU 2016-14 is effective for annual financial statements issued for fiscal years beginning after December 15, 2017, and for interim periods within fiscal years beginning after December 15, 2018. Application to interim financial statements is permitted but not required in the initial year of application. Early application of the amendments in this Update is permitted. Stay tuned for the next part of our series, “New Financial Reporting Standards for Nonprofits: 2017 Update.” Contact any member of our Not-for-Profit Services Team for additional guidance.