August 22, 2016 – On August 18, 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2016-14 (ASU 2016-14), Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities.
Why the Change?
According to FASB.org, “The FASB’s Not-for-Profit Advisory Committee (NAC) and other stakeholders indicated that existing standards for financial statements of not-for-profits (NFPs) are sound but could be improved to provide more useful information to donors, grantors, creditors, and other users of financial statements.”
This ASU represents the first phase of an expected two-phase project to improve financial reporting by NFPs. ASU 2016-14 is effective for fiscal years beginning after December 15, 2017, however, early adoption is allowed.
The key features of the ASU are as follows:
- Net asset classifications are being reduced from three to two categories: with donor restrictions and without donor restrictions.
- Expanded disclosures about the nature and amount of any donor restrictions, as well as any board designations of net assets without donor restrictions, will be required.
- Underwater donor-restricted endowments will be included in “with donor restrictions.” There will be enhanced required disclosures for underwater endowments, including disclosure of policies for reducing or ceasing spending from such endowments.
- The placed-in-service approach will be required for determining when restrictions are met for all capital gifts, eliminating the over-time option for expiration of capital restrictions.
- Additional disclosures will be required to communicate information useful in assessing liquidity within one year of the balance sheet date. These additional disclosures will include both qualitative and quantitative information.
- Organizations that present an operating measure will be required to provide some additional disclosures about that measure.
- The indirect or direct method of presenting the statement of cash flows will be allowed. However, the reconciliation of operating items no longer will be required when using the direct method.
- When an organization derives net investment return from several different sources, such as donor endowments and unrestricted operating endowments, it may present the net investment return in multiple line items in the statement of activities.
- Several new reporting requirements related to expenses are included, as follows:
- Disclosure of expenses by both nature and function
- Disclosure of expenses netted with investment return
- Enhanced disclosures regarding cost allocations
- ASU 2016-14 eliminates the requirement to disclose the unrealized gains and losses for the period related to equity securities held at the report date as previously required by ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.
We will keep you updated as Phase 2 progresses.
About the Author
Karen D. Costa CPA
Karen, Assurance Services Director and Co-Leader of the Dopkins Not-for-Profit and Healthcare Teams, has lengthy experience with both for-profit and not-for-profit healthcare organizations specializing in auditing, revenue cycle consulting and certification of their Medicaid cost reports and specialized compliance audits.