Ready or not, the effective date of the first and most substantial change to not-for-profit financial reporting since FASB 116/117 is rapidly approaching, and it will mark a significant change in the way that NFPs tell their financial story. Currently in Phase I, FASB Accounting Standards Update (ASU) 2016-14 was issued in August 2016 and is effective for years beginning on or after December 15, 2017.
This will affect in some way every NFP organization and how they present their financial statements, with key changes including:
- Net Asset Classification
- Presentation of Investment Return/Expenses,
- Reporting and Disclosure of Operating Measures,
- Reporting and Disclosure of Liquidity/Availability and Resources,
- Presentation of the Cash Flow Statement
Following a project designed to improve the net asset classification requirements and information presented in financial statements and notes about NFP liquidity, financial performance, and cash flows, the FASB’s Not-for-Profit Advisory Committee (NAC) and other stakeholders found that while existing standards were sound, improvements could be made to provide more useful information to donors, grantors, creditors, and other users of financial statements.
Problems/Issues That ASU 2016-14 Seeks to Address
This Update makes several improvements to current reporting requirements that address, among others, the following problems:
- Temporary/Permanent Restrictions to Funds and Net Asset Classification: Complexities about the use of the currently required three classes of net assets that focus on the absence or presence of donor-imposed restrictions and whether those restrictions are temporary or permanent.
- Transparency Surrounding Unrestricted vs. Restricted Assets: Deficiencies in the transparency and utility of information useful in assessing an entity’s liquidity caused by potential misunderstandings and confusion about the term unrestricted net assets and how restrictions or limits imposed by donors, grantors, laws, contracts, and governing boards affect an entity’s liquidity, classes of net assets, and financial performance
- Expense Inconsistencies: Inconsistencies in the type of information provided about expenses of the period—for example, some, but not all, NFPs provide information about expenses by both nature and function
- Presentation of Cash Flow (Direct vs. Indirect): Impediment of preparing the indirect method reconciliation if an NFP chooses to use the direct method of presenting operating cash flows.
Who is Affected?
This Update affects NFPs and anyone who uses NFP Financial Statements.
- Not-for-Profit Organizations: Nongovernmental entities such as charities, foundations, colleges and universities, health care providers, cultural institutions, religious organizations, and trade associations, among others.
- Resource Providers/Decision Makers: Lenders, bondholders, donors, and grantors, including foundations and governmental agencies, among other decision makers.
Accounting Standards Update 2016-14 is effective for years beginning on or after December 15, 2017.
The full text is available from the FASB Website: Update 2016-14: Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not for Profit Entities.
Learn More: Getting It Right: Understanding the New Not-for-Profit Financial Reporting Standard (June 15, 2017—CPE Credits Available)
On June 15, 2017, our parent company Wipfli will present a webcast on this standard, sharing its effects, the decisions you should start making today in order to have compliant reporting, and the steps you should take to help your auditors to gather information.
Get 1.0 Continuing Professional Education (CPE) for attending this free webinar presented by Wipfli LLP Senior Manager Stephanie Cavadeas, who will:
- Share the main components and objectives of the new standard.
- Review examples of what the changes will look like in comparison to existing GAAP in order to compile the appropriate information for your organization.
- Discuss and formulate an implementation plan for your organization.