In August 2016, after spending over a year deliberating upon its preliminary release, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-14 “Not-for-Profit Entities (Topic 958).” This update is the culmination of the work of the FASB Not-for-Profit Financial Statements Project and comprehensively addresses the accounting model utilized for nonprofit entities for the first time in over 20 years. The resulting ASU has the effect of updating, but not overhauling, the current financial statement model used by nonprofit organizations. This article details the largest components of this update, discusses transition dates and strategies, and provides implementation and readiness tips for organizations.
What is in the new standard?
The key changes in the new standard:
- enhance information about the liquidity and availability of financial resources. An additional disclosure will add qualitative information about how an organization manages its liquid available resources and its liquidity risk. In addition, new quantitative disclosures will require presentation of information that communicates clearly the availability of an organization’s financial assets at the statement of financial position date to meet cash needs for general expenditures within one year;
- improve presentation and disclosure for net asset classes by streamlining the classes into two categories, instead of the current three. The new categories will simply be net assets with, and without, donor restrictions. The new standard reemphasizes disclosure requirements about net asset restrictions and adds new disclosure requirements about net asset designations. It also revises and strengthens accounting disclosures for underwater endowments. Finally, the ASU eliminates implied time restrictions for capital gifts;
- allow free choice between the direct method and the indirect method in presenting operating cash flows. Organizations are no longer required to present an indirect method reconciliation if they choose to present the direct method;
- require better information about expenses and expense allocation. This new requirement forces presentation of expenses by nature as well as by function, including a related analysis. Regardless of whether the organization chooses to display this information in the notes or in a separate statement of functional expenses, the effect of this requirement is that all organizations will now be presenting a statement of functional expenses (at present, only Voluntary Health and Welfare Organizations have this requirement). In addition, the ASU requires qualitative information about cost allocation and improves guidance on allocation from management and general expenses; and
- improve reporting of investment returns by requiring reporting net of external and direct internal investment expenses and eliminates the disclosure requirement for netted investment expenses and investment return components.
When does it become effective?
The effective date of this new update is for fiscal years beginning after December 15, 2017. As a result, this update will generally need to be in place for calendar years ending December 31, 2018 or fiscal years ending 2019. Early adoption is permitted; however, in the year of adoption, all provisions need to be adopted at once. In the year adopted, for comparative years presented, organizations need to apply all provisions retroactively. The only exceptions to this is that for comparative information presented, an organization can choose not to present the analysis of expenses by nature and function (unless already required) and the disclosures around liquidity and availability of resources. In the next couple of years, organizations will need to determine when they will adopt the ASU.
How can nonprofits prepare?
Organizations should start to evaluate how they will be affected by this update. We recommend organiza-tions:
- prepare for the enhanced liquidity disclosures by preparing the required qualitative and quantitative disclosure based on the most current audited financial statements and evaluate what it might say to readers of their financial statements. Organizations can use the time until adopting the new rules to determine how the disclosure will best benefit the organization. Our expectation is that this new disclosure will prompt discussion at the management and board levels of nonprofit organizations and may provoke useful and meaningful conversation on what it reveals. It is better to have these discussions now rather than later;
- that currently do not present a statement of functional expenses spend time now considering how they will include such a statement in their next financial statements. It will take time to design procedures for allocating and presenting these expenses in a timely manner and in more detail than may be required on the Form 990;
- with both temporarily and permanently restricted net asset classes consider how the presentation of their financial statements will be affected by the reduction in the presentation categories. There are new options for presentation of board-designated net assets in this regard. Organizations with underwater endowments should explore the new disclosures in this regard and evaluate how they reflect upon the organization;
- for which investment returns are a significant and material component to the financial statements evaluate how their current financials would be changed to reflect the new rules on netting investment returns and costs; and
- examine if switching to presentation of the cash flow statement using only the direct method would provide more useful information about the operations of the organization to users of the financial statements.
Conclusion
The Windes Nonprofit group looks forward to assisting nonprofit organizations and fellow professionals in implementing this new accounting standard as it becomes effective.
To that end, we presented a workshop for nonprofit organizations about the new rules on January 17, and will conduct another seminar on May 2, 2017, from 11:30 a.m. to 1:30 p.m. at our corporate headquarters in Long Beach. Lunch will be provided. This is your opportunity to get ahead of the process and understand what will be required.
If you are interested in attending on May 2, 2017, you will find detailed information and may register at the link below. For questions about the workshop, please contact Carolyn De Baca at cdebaca@windes.com.
Select the following link for details and to register for the ASU 2016-14 workshop:
http://bit.ly/2iOS0PH.
For questions or more information about this article, please contact Michael Barloewen at mbarloewen@windes.com or toll free at 844.4WINDES.