In August of 2016, the FASB issued ASU 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements for Not-for-Profit Entities. ASU 2016-14 establishes a new financial reporting framework for not-for-profit entities. This will result in changes to the presentation of the statements of financial position, activities, and cash flows. Organizations need to think about when to adopt and the impact this will have on their external financial reporting.
The guidance reduces the classification of net assets to two categories: (1) net assets without donor restrictions and (2) net assets with donor restriction. It also changes the classification and accounting for underwater endowments. ASU 2016-14 requires enhanced net asset disclosures which include information about the timing, nature of restrictions, and composition of the net assets with donor restrictions. Enhanced disclosures are also required for board designated net assets, which are classified as net assets without donor restrictions.
To improve the transparency and utility of liquidity information provided in not-for-profit financial statements, ASU 2016-14 requires disclosure of quantitative and qualitative liquidity information, including how an entity manages liquidity risk and disclosures about availability of assets to meet cash needs within one year of the balance sheet date.
Changes to the statement of activities includes a requirement to report the total change in net assets and the changes in each of the two new classes of nets assets described above. All nonprofits will be required to present an analysis of expenses by function and by natural classification. This can be done on the face of the statement of activities, in a separate statement, or in the footnotes to the financial statements. The statement of cash flows may be presented using the direct or indirect method. If the direct method is used, the Organization is no longer required to include the indirect method reconciliation.
ASU 2016-14 is effective for the fiscal years beginning after December 15, 2017. Early adoption is permitted and encouraged. Management is evaluating the impact this guidance will have on the Organization’s financial reporting and determining the appropriate time to implement this pronouncement.
For more information on reporting standards for nonprofit organizations, contact Christine Arthur today.