While we’ve spent a pretty fair amount of time discussing the ASC 606 standard, we need to take a step back today to look at a more pressing standard update—especially for nonprofit organizations including labor organizations, schools, charities, and more. The goal of this update, of course, is to improve reporting transparency, but as with any major update, it goes much deeper than that. Today, we’d like to share with you a brief look at the update, and offer our DC friends an opportunity to get in-depth knowledge and ask questions at a November live event.
Accounting Standards Update 2016-14 Not-for-Profit Entities (Topic 958) Presentation of Financial Statements of Not-for-Profit Entities
We started looking at the update this June, discussing how it clarified temporary and permanent asset restrictions, cleared up expense inconsistencies, and improved cash flow presentation, but would like to today dig into the standard, discussing some of the key things finance leaders will need to address before the effective date—December 15, 2017.
Six Provisions of the New Standard
There are 6 main provisions of the new standard.
1) Donor Restrictions in Statement of Financial Position
Present on the face of the statement of financial position amounts for two classes of net assets at the end of the period, rather than for the currently required three classes. That is, an NFP will report amounts for net assets with donor restrictions and net assets without donor restrictions, as well as the currently required amount for total net assets.
2) Donor Restrictions in Statement of Activities
Present on the face of the statement of activities the amount of the change in each of the two classes of net assets (noted in item 1) rather than that of the currently required three classes. An NFP would continue to report the currently required amount of the change in total net assets for the period.
3) Changes to Methodology Disclosure Requirements
Continue to present on the face of the statement of cash flows the net amount for operating cash flows using either the direct or indirect method of reporting but no longer require the presentation or disclosure of the indirect method (reconciliation) if using the direct method.
4) Changes to Disclosures
NFP Organizations will need to prepare enhanced disclosures regarding the following:
- Amounts and purposes of governing board designations, appropriations, and similar actions that result in self-imposed limits on the use of resources without donor-imposed restrictions as of the end of the period.
- Composition of net assets with donor restrictions at the end of the period and how the restrictions affect the use of resources.
- Qualitative information that communicates how an NFP manages its liquid resources available to meet cash needs for general expenditures within one year of the balance sheet date.
- Quantitative information, either on the face of the balance sheet or in the notes, and additional qualitative information in the notes as necessary, that communicates the availability of an NFP’s financial assets at the balance sheet date to meet cash needs for general expenditures within one year of the balance sheet date. Availability of a financial asset may be affected by
- its nature,
- external limits imposed by donors, grantors, laws, and contracts with others, and
- internal limits imposed by governing board decisions.
- Amounts of expenses by both their natural classification and their functional classification. That analysis of expenses is to be provided in one location, which could be on the face of the statement of activities, as a separate statement, or in notes to financial statements.
- Method(s) used to allocate costs among program and support functions.
- Underwater endowment funds, which include required disclosures of
- An NFP’s policy, and any actions taken during the period, concerning appropriation from underwater endowment funds, (
- The aggregate fair value of such funds,
- The aggregate of the original gift amounts (or level required by donor or law) to be maintained, and
- The aggregate amount by which funds are underwater (deficiencies), which are to be classified as part of net assets with donor restrictions.
5) Expense Clarification
Report investment return net of external and direct internal investment expenses and no longer require disclosure of those netted expenses.
6) Additional Changes in Reporting Restrictions
Use, in the absence of explicit donor stipulations, the placed-in-service approach for reporting expirations of restrictions on gifts of cash or other assets to be used to acquire or construct a long-lived asset and reclassify any amounts from net assets with donor restrictions to net assets without donor restrictions for such long-lived assets that have been placed in service as of the beginning of the period of adoption (thus eliminating the current option to release the donor-imposed restriction over the estimated useful life of the acquired asset).
For more information, contact us!