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Major Changes Coming For NFP Financial Statements

Not For Profit Accounting Standards

By Nicole Riley, CPA, CFE

The Financial Accounting Standards Board (FASB) is responsible for setting and modifying accounting rules for all companies that comply with generally accepted accounting principles (GAAP). Over the past several years, the FASB has issued substantial new accounting standards updates, or ASUs. While all companies and organizations must muddle through the new revenue recognition standards (ASU 2014-09) and the new lease accounting standards (ASU 2016-02) during the next few years, not-for-profit organizations also have to implement ASU 2016-14, Not-for-Profit Entities (Topic 958) Presentation of Financial Statements of Not-for-Profit Entities.

ASU 2016-14 is a real game changer for the not-for-profit community and is the first major overhaul of not-for-profit financial statements in approximately two decades.

Users of not-for-profit financial statements have long had difficulties assessing an organization’s liquidity and understanding the restrictions on net assets. The FASB issued ASU 2016-14 in an attempt to improve current reporting requirements and provide more useful information on liquidity, financial performance and cash flow to users of not-for-profit financial statements. While ASU 2016-14 includes significant changes and many details in its 270 pages, here’s a brief overview of some of the more significant provisions.

  • Classes of net assets were reduced from three classes to two. Unrestricted, temporarily restricted and permanently restricted net assets will no longer be seen in the financial statements and are being replaced with the terms “with donor restrictions” and “without donor restrictions.” The disclosures regarding net assets are also being enhanced and will require organizations to disclose additional information, such as details of board designations, the composition of net assets with donor restrictions and how restrictions affect the use of resources.
  • The requirement is removed that presented the indirect reconciliation currently required if an organization presents its cash flow statement using the direct method. By removing this requirement, the FASB has reduced the burden in presenting the direct method of cash flows.
  • Expense reporting gets a makeover. Now, all entities will be required to present their expenses by function and natural classification. Voluntary health and welfare organizations already are required to show this information in a statement of functional expenses, but ASU 2016-14 will allow an organization to choose where in the financial statements it presents this information. The information can be included in the statement of activities, in a separate statement or in the notes to the financial statements.
  • Disclosures regarding endowment funds are also being revisited and enhanced. When the assets of an endowment held by an organization drop below the original donation required to be held in perpetuity, the endowment is considered to be “underwater.” ASU 2016-14 requires an organization to disclose its policy, and any actions taken during the period, concerning appropriations from underwater endowment funds. The standard also requires the organization to disclose the aggregate fair value of such funds, original gift amounts and the amount by which the funds are underwater. The financial statements will no longer present the full original gift amounts as donor restricted and borrow from unrestricted for the underwater portion.
  • New liquidity disclosures requirements are significant. Possibly the most significant provision of ASU 2016-14, these provisions require not only quantitative information, but also qualitative information regarding financial assets that are available to meet cash needs for general expenditures within one year from the balance sheet date. The organization must quantitatively communicate the availability of those financial assets and communicate how it manages its liquid resources. Limitations on the use of assets, such as donor imposed restrictions, laws, contracts, nature of asset and internal board designations are examples of disclosures that will be required to be included to communicate the availability of a financial asset.

If an organization does find itself in the position during the year where it is not able to maintain appropriate amounts of cash and cash equivalents to comply with donor-imposed restrictions, that fact will also need to be disclosed. In addition, unusual circumstances, such as special borrowing arrangements, requirements to hold cash in separate accounts and other known significant liquidity problems will also be required to be disclosed.

We are advising our clients to begin now to consider how this ASU will impact their financial statements and prepare for implementation. Although the ASU can be early implemented, it is required to be adopted no later than fiscal years beginning after Dec. 15, 2017. If an organization does not have procedures in place to track all the necessary information that will be required, I recommend organizations evaluate those needs now and get them in place before the end of 2017.

Finally, retrospective application in the first year is required. However, if the organization is presenting comparative financial statements, the organization will have the option to omit the analysis of expenses and disclosures about liquidity and availability of resources for any periods presented before the period of adoption.

Learn more about how PKF Texas and how our Not-For-Profit Industry Team can co-create a client experience for your organization.

Nicole Riley, CPA, CFE, is an audit senior manager with PKF Texas. Contact her at nriley@pkftexas.com.