Following the guidance in the FASB’s recently issued accounting standard update (ASU) 2016-14, Presentation of Financial Statements of Not-for-Profit Entities, your organization can improve how it classifies its net assets in its financial statements. You’ll also find new guidance for presenting information about liquidity and availability of resources, expenses and investment performance, and cash flows.
ASU 2016-14 applies to substantially all nonprofits, including public charities, cultural institutions, professional trade associations, colleges and universities, religious organizations and health care providers. Donors, grantors, creditors and others who use the financial statements of not-for-profit entities are also affected.
Net asset classification The new guidance replaces the three classes of net assets (unrestricted, temporarily restricted and permanently restricted) currently on the statement of financial position. It creates two new classes based on the presence or absence of donor-imposed restrictions. In the statement of activities, nonprofits must present changes in each of these two new classes — namely, net assets with donor restrictions and net assets without donor restrictions. The new guidance also: Changes the net asset classification of donor-restricted endowment funds — that is, when the fair value is less than either the original gift amount or the amount required to be maintained by the donor or by law (underwater endowment funds), and enhances quantitative and qualitative disclosures about underwater endowment funds.
Accordingly, if a donor-restricted endowment fund is an underwater endowment fund, the accumulated losses will now be included with that fund in net assets with donor restrictions. Eliminates, in the absence of explicit donor stipulations on capital gifts, the option to release over the estimated life of the acquired asset the donor-imposed restrictions on gifts of cash or other assets to be used to acquire or construct a long-lived asset (the over-time approach). It now requires a nonprofit to release these donor restrictions following the placed-in-service approach. Requiring all nonprofits to follow the placed-in-service approach to be followed by all nonprofits will result in greater comparability and consistency across the industry.
Requires additional disclosures with respect to board-designated net assets to include the amount, purpose and type of designations. Requires nonprofits that use an operating measure that includes governing board designations, appropriations and similar actions (internal transfers) included in the measure to report these transfers, with appropriate disaggregation and description by type, either broadly on the face of the financial statements or in the notes to the financial statements.
Liquidity and availability of resources
The ASU requires specific disclosure requirements intended to improve a financial statement user’s ability to assess a nonprofit’s available financial resources, along with its management of liquidity and liquidity risk.
The requirements include:
- Quantitative and qualitative information the nonprofit’s access to financial assets to meet cash needs for general expenditures within one year of the reporting date, including factors that may affect the financial assets’ availability
- Qualitative information, in the notes to the financial statements, that is useful in assessing the nonprofit’s liquidity and communicates how the nonprofit manages its liquid resources to meet cash needs for general expenditures within one year of the reporting date
Expense reporting and investment performance
ASU 2016-14 requires a nonprofit to present expenses by both their natural and functional classification in a single location in the financial statements — or for certain entities, as supplementary information to the financial statements. This information can be presented on the statement of activities, as a separate statement or in the notes to the financial statements. Nonprofits must also describe the methods used to allocate costs among program and support functions.
The new guidance also requires nonprofits to present investment performance for the reporting period net of related external and direct internal investment expenses. Direct internal investment expenses pertain to the direct conduct or direct supervision of the strategic and tactical activities involved in generating investment return. The new guidance further eliminates the current requirement to disclose the amount of netted expenses.
Operating cash flows
Nonprofits continue to have the option to present cash flows using either the direct or indirect method. Those electing the direct method are no longer required to present or disclose the indirect method reconciliation.
The new guidance is effective for annual financial statements for fiscal years beginning after Dec. 15, 2017, and for interim periods within fiscal years beginning after Dec. 15, 2018. Nonprofits may early adopt ASU 2016-14 but may initially adopt it only for an annual period or for the first interim period within the fiscal year of adoption.
A retrospective approach must be used to adopt the new guidance. If a nonprofit presents comparative financial statements, it can omit certain information for any periods presented that are prior to the adoption period. In the adoption period, a nonprofit is required to disclose the nature of any reclassifications or restatements and any effects on changes in the net asset classes for each period presented.
Compliments of Grant Thornton – a member of the EACCNY