An Accounting Standards Update (ASU) was released recently by the Financial Accounting Standards Board (FASB) that will change the way all not-for-profits (NFPs) classify net assets and prepare financial statements.
The FASB believes the update will improve NFP financial statements and provide more useful information to donors, grantors, creditors, and other financial statement users. The standard is effective for annual financial statements issued for fiscal years beginning after December 15, 2017 and for interim periods within fiscal years beginning after December 15, 2018.
The first of a two-phase project, the amendments in FASB ASU 2016-14 are intended to make immediate improvements that address:
- Complexity in net asset classification
- Clarity of information regarding liquidity and availability of cash
- Transparency in reporting of financial performance measures
- Consistency in reporting expenses by function and nature
- Utility of the statement of cash flows
The new standard will result in the three existing classes of net assets (unrestricted, temporarily restricted, and permanently restricted) becoming two: net assets without donor restrictions and net assets with donor restrictions.
To enhance understanding of the donor restrictions, disclosures will now be required that must include the timing and nature of the restrictions, along with the composition of net assets with donor restrictions at the end of the period. The disclosures will continue to show an analysis by time, purpose, and perpetual restrictions.
Underwater Endowments: As part of the change to classification of net assets, endowments that have a current fair value that is less than the original gift amount, known as "underwater" endowments, are now classified in net assets with donor restrictions, instead of the current classification in unrestricted net assets.
Expanded disclosures must include the following information:
- The original amount of the endowment
- The NFP’s policy relating to spending from these funds
- Whether that policy was followed
Board-designated Net Assets: As a not-for-profit, your governing board may make designations that result in self-imposed limits on the use of resources without donor restrictions, known as board-designated net assets; you will need to provide enhanced disclosure information on the amounts and purposes of these designations. The option to imply a time restriction and release the restriction over an asset’s useful life will no longer be permitted.
Transparency and Utility of Liquidity Information: You will be required to provide information about liquidity and to provide financial statement users with an understanding of an entity’s risks and risk management.
Reporting the change in total net assets for the period continues to be a requirement. In addition, you will need to report the amount of change in each of the two classes of net assets in the statement of activities.
Presentation of Investment Expenses: You will be required to give a net presentation of investment expenses against investment return on the face of the statement of activities. External and direct internal investment expenses will be netted against the investment return. A disclosure of the components of investment expense will no longer be required.
Expenses Classified by Function and Nature: You will be required to present an analysis of expenses by both function and natural classification, each on a separate statement.
Presentation of Cash Flow Information: You may continue to present cash flows from operations using either the direct or indirect method.