New Not for Profit Accounting Standard
In August 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-14 Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities. Financial reporting guidance for Not-for-Profit (NFP) entities prior to the new standard had not undergone any major changes in 20 years. The FASB’s goal was to enhance the existing guidance with clearer communication regarding financial performance of NFP entities for those who make decisions based on the financial statements of those NFP entities.
Significant changes in presentation of financial statements and disclosures for NFP entities under the new standard include the following:
Net Asset Classes: Prior to the new guidance, net assets were categorized using three classes: unrestricted, temporarily restricted, or permanently restricted. “Restricted” means a donor has placed a time or purpose restriction on a donation they’ve given. If the time or purpose restriction imposed by a donor is not met at the end of an NFP entity’s year end, it is classified as a temporarily or permanently restricted net asset at the statement of financial position date. All other net assets are considered unrestricted and are available for operations, or designated by the NFP’s Board of Directors.
The new guidance reduces the number of net asset classes to two: net assets with donor restrictions and net assets without donor restrictions. With these two asset classes, disclosures will focus on the composition of each class based on external donor restrictions (net assets with donor restrictions) and internal board designations (net assets without donor restrictions). Required disclosures regarding net assets include the timing and nature of donor restrictions on net assets.
Liquidity Disclosures: NFP entities will be required to add disclosures regarding liquidity, including both quantitative and qualitative information. The NFP will include in their footnote disclosures a discussion regarding how they manage liquidity and about their ability to meet cash needs for general expenditures within one year of the statement of financial position date. Presenting a classified statement of financial position which includes current assets and current liabilities will provide some of the substantiation for meeting cash needs in the coming year, in addition to enhanced disclosures regarding liquidity. The focus with these new disclosures is related to how well the NFP manages its finances.
Reporting Expenses by Functional and Natural Classifications: Presenting expenses by function and nature under prior guidance was only required for certain NFP entities. The new guidance expands this guidance to all NFP entities, along with a requirement to describe the method used to determine the allocation among functional categories. Functional classifications relate to the major functions within a NFP: Programs, Management and General, and Fundraising. Natural classifications are by type: wages, rent, office expense, etc. The presentation by function and natural category can be included in the statement of activities, or in a separate statement of functional expenses, or disclosed in the notes to the financial statements.
The new guidance is effective for annual financial statements issued for years beginning after December 15, 2017 (calendar 2018 and fiscal year entities ending beyond December 31, 2018). Early adoption is permitted.
NFP entities should start preparing now for transition to the new guidance. Contact Sue at 952-476-7119 or Sue_Thompson@copelandbuhl.com and she can assist you with this process.