Significant Changes Announced to Not-For-Profit Financial Statements

The Financial Accounting Standards Board (FASB) released its first significant change to not-for-profit entities’ financial statements since 1993. On August 18, 2016, Accounting Standards Update (ASU) No. 2016-14: Presentation of Financial Statements of Not-for-Profit Entities was released, making changes that will both simplify the face of financial statements and enhance disclosures in the notes of the financial statements of not-for-profit entities. The ASU changes many aspects of the financial statements and notes, but the most significant changes come in five areas: net asset classes, liquidity and availability of resources, investment returns, expenses, and the statement of cash flows.

Net Asset Classes

• Net assets are no longer classified into three categories (unrestricted net assets, temporarily restricted net assets, or permanently restricted net assets).
• Net assets will now be classified as either net assets with donor restrictions or net assets without donor restrictions.
• If the not-for-profit entity has any underwater endowment funds, the ASU requires additional disclosures in the notes of the financial statements.

Liquidity and Availability of Resources

• Additional disclosures are required to provide qualitative information on how a not-for-profit manages its liquid resources to meet cash needs for general expenditures within one year of the balance sheet date.
• Additional disclosures are required to provide quantitative information on the availability of a not-for-profit’s assets to meet cash needs for general expenditures within one year of the balance sheet date.

Investment Returns

• Investment returns must be presented net of all related external and direct internal expenses.
• The disclosure of netted expenses is no longer required.

Expenses

• Expenses must be presented by nature and function.
• An analysis of expenses by nature and function must also be presented.
• Presentation may be done on the face of the statement of activities, as a separate statement, or in the notes of the financial statements.

Statement of Cash Flows

• The statement of cash flows may continue to be presented using either the direct method or indirect method.
• If using the direct method, the ASU eliminates the requirement to present a reconciliation of operating activities.

These changes are effective for annual financial statements issued for fiscal years beginning after December 15, 2017. In other words, if you are a calendar year not-for-profit entity you are not required to reflect ASU 2016-14 until you issue your financial statements for the year ended December 31, 2018. Early adoption of the ASU is permitted, but you must keep in mind that these changes must be applied retrospectively.

Should you have any questions on ASU 2016-14, please contact me or one of my associates at Alloy Silverstein.