Written by Eric Lampe
Earlier this year, the Financial Accounting Standards Board (FASB) issued new guidance on an accounting standard impacting nonprofit organizations.
The FASB issued Accounting Standard Update (ASU) 2016-14 in August 2016 to improve net asset classifications, provide more information regarding financial performance, cash flows, and liquidity, and allow not-for-profits (NFP) to better tell their financial story.
To help your organization navigate these changes, we’re breaking down five areas addressed in the update, including: net asset classes, liquidity & availability, expense reporting, investment return, and statement of cash flows.
Net Asset Classes
Net asset classes have been reduced from three (unrestricted, temporarily restricted, and permanently restricted) to two (without donor restrictions and with donor restrictions). The transition from three to two will not be difficult for those organizations who are used to tracking their funds in the manner. The portion that will take some time will be the enhanced disclosure requirements for donor restricted and board restricted amounts.
Liquidity & Availability
The accounting standard update added a new footnote disclosure designed to allow the users of the financial statements to better understand more about how the NFP manages its liquid resources available as of the balance sheet date.
On a basic level, this means projecting your needs for your current assets through both a qualitative and quantitative disclosure. The qualitative will focus on how the NFP manages its liquid investments, while the quantitative will communicate the availability of financial assets for spending. These disclosures are expected to take significant research and discussion with management to create the footnotes.
All NFPs are required to include a statement of activities in their financial statements. Typically, expenses are grouped by function or programs the NFP provides. The update requires NFPs to report expense based on their natural classifications such as salaries, taxes, legal, supplies, travel, etc. The easiest way to follow this standard is to create a separate schedule that follows the statement of activities. This means NFPs will have to analyze their chart of accounts and financial statement groupings to split expense not only by function, but also by natural expense within that function.
By far the easiest of the new standard is the investment return component requiring NFPs to combine investment income with investment fees. This gives the NFPs a net return on investment and should be as easy as regrouping your investment fees account.
Statement of Cash Flows
The final change to come from the update is the reporting required for the statement of cash flows. In the past, NFPs that presented the cash flows on a direct method, were also required to report the indirect method. Now, if your NFP presents on the direct method, a separate indirect method is not required.
The above information is just a snapshot of the numerous changes issued by the FASB regarding not-for-profit reporting. Your organization should be taking steps now to ensure its accounting system is aligned with the latest standard. If you have questions about how ASU 2016-14 will impact you, contact your client administrator.
Eric Lampe, CPA is a Manager specializing in auditing at The Whitlock Company, a full-service CPA firm redefining what traditional accounting means, offering a range of professional tax, audit, accounting, consulting and management advisory services in the Midwest regions. Learn more at www.whitlockco.com.