written by Eric Lampe
The new accounting standard (ASU 2016-14) was issued in August in order to update the current model of financial statement reporting for Not-for-Profits (NFP). The idea was to improve net asset classifications, clarify information in the financial statements and related notes, and better enable NFPs to present their financial story.
Removal of Three Classifications
In the past, NFPs were allowed three classifications of net assets, Unrestricted, Temporary Restricted, and Permanently Restricted. FASB decided with ASU 2016-14, that users of financial statements were really more interested in whether funds have been reserved by donor restriction or not. This lead to removing the three classifications used in the past and instead using the two classifications of Net Assets without Donor Restrictions or Net Assets with Donor Restrictions. Essentially, this combines the Temporary Restricted and Permanently Restricted assets into one category, with Unrestricted assets being relabeled as Net Assets without Donor Restrictions.
With the changes above, additional disclosures were added to the notes to the financial statements. Net Assets without Donor Restrictions are required to report any amount, purpose, and type of board designations. Net Assets with Donor Restrictions are required to disclose the nature and amount of any donor restrictions.
Another enhanced disclosure has to do with “Underwater Endowments”. These are endowments where the principle of the gift has dropped below the gift amount due to overspending or market losses. In addition to the aggregate amounts by which funds are underwater, NFPs must also disclose original gift amounts, fair value, and any governing board policy or actions taken, concerning appropriation from such funds.
A New Disclosure
The biggest change is the disclosure for Liquidity and Availability of Resources. This disclosure has two distinct requirements. The Qualitative Requirement requires NFPs to provide information of how it manages its liquid available resources and its liquidity risk. Also required in the Quantitative Requirement which communicates the availability of a NFP’s financial assets at the balance sheet date to meet cash needs for general expenditures within one year.
The final major change from ASU 2016-14 was the requirement for a statement of functional expenses. The statement of functional expenses is described as a matrix since it reports expenses by their function (programs, management and general, fundraising) and by the nature or type of expense (salaries, rent). Many NFPs already have this schedule included as supplementary information.
ASU 2016-14 is effective for fiscal years beginning after 12/15/2017, which means that your 2018 audits will be effected by the changes described above. There are a few additional changes that might affect your entity, so please call us for more information 417-881-0145.