Nonprofits: Have You Started Gearing Up for New Accounting Rules?February 28, 2017
The changes found in Accounting Standards Update (ASU) No. 2016-14, Presentation of Financial Statements of Not-for-Profit Entities (Topic 958), will affect the financial statements of virtually every nonprofit that follows U.S. Generally Accepted Accounting Principles (GAAP).
For the first time since 1993, the Financial Accounting Standards Board (FASB) has updated its guidance for nonprofit organizations. The changes found in Accounting Standards Update (ASU) No. 2016-14, Presentation of Financial Statements of Not-for-Profit Entities (Topic 958), will affect the financial statements of virtually every nonprofit that follows U.S. Generally Accepted Accounting Principles (GAAP).
The standard is effective for fiscal years beginning after December 15, 2017. Organizations with a December year end would have to apply this standard for 2018. Organizations with a fiscal year end (for example, a June 30 year end) would apply this standard for the year ended June 30, 2019. Organizations can implement the standard early. Here’s a brief summary of some of the updates in the standard.
Net Asset Classes
One of the most significant changes under ASU 2016-14 is the reduction of the number of net asset classes from three to two: 1) net assets with donor restrictions, and 2) net assets without donor restrictions. The terms “unrestricted,” “temporarily restricted” and “permanently restricted” will no longer be used in the financial statements.
The standard also changes the reporting and enhanced disclosure requirements for “underwater” endowments, in which the fair value is less than the original gift amount.
The new standard also eliminates the option of releasing restrictions over time for restricted contributions used for the purchase of capital expenditures, such as buildings, equipment, etc. Nonprofits must use the placed-in-service approach, which requires that the restrictions be released when the related asset is placed in service, unless the donor specifies otherwise.
Liquidity and Resource Reporting
The new guidance also requires nonprofit financial statements to include certain qualitative and quantitative disclosures related to the organization’s liquidity. Quantitative disclosures explain whether financial assets are available to meet cash needs for general expenses within the year following the balance sheet date.
Qualitative disclosures will show how a nonprofit manages liquid resources to meet cash needs for general expenses for the upcoming year. This disclosure will require a high degree of involvement by members of management to determine the allocation of financial resources required for disclosures under ASU 2016-14.
Expenses and Investment Returns
The updated guidance will also require all nonprofits to classify and disclose expenses by nature and function. “Nature” means expense categories such as compensation, rent and utilities. “Function” generally refers to program services and supporting activities (i.e., management and general and fundraising).
In addition, the guidance requires that investment return be presented net of all direct internal and external investment expenses. Investment expenses can no longer be included with the functional expense analysis.
Are you ready for the changes under ASU 2016-14? The FASB allows nonprofits to apply these changes early, but even if you’re not adopting early you should address the major changes sooner rather than later.
Stay tuned for more information on each change in our new series—“New Reporting Standards for Nonprofits: 2017 Update”.
For help adjusting your financial statements, systems and processes appropriately, contact our not-for-profit services team