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Earlier this week, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No, 2016-14, Presentation of Financial Statements of Not-for-Profit Entities. As expected, the ASU makes significant changes to the not-for-profit financial reporting model that has been in effect since 1993. However FASB deferred the issue of an operating measure until a later update.
The ASU is effective for years beginning after December 15, 2017 (i.e., 2018), with early application permitted. Changes are to be applied on a retrospective basis, but certain provisions are not required to be implemented for the prior year comparative statements.
The main provisions of the update are as follows-
1) Balances and activities will be reported by two net classes – net assets without donor restrictions, and net assets with donor restrictions. Current reporting uses three net asset classes – unrestricted, temporarily restricted, and permanently restricted.
2) In the statement of cash flows, operating cash flows may continue to be presented using either the indirect or the direct method (the draft of the update would have eliminated the indirect method). The requirement to reconcile the change in net assets to operating cash flows has been eliminated.
3) All NFP’s must report expenses by both natural classification (e.g., salaries, rent, etc.) and functional classification in one location, either in the statement of activities, a separate statement of functional expenses, or in the notes. Previously, only voluntary health and welfare organizations were required to do this.
4) Investment income is to be reported net of external and (if applicable) internal investment expenses, and the netted expenses no longer need be disclosed.
4) The following enhanced disclosures will be required-
The ASU will bring some welcome uniformity to not-for-profit reporting. Some provisions will simplify financial statements, but others will add complexity, particularly in disclosures.
The complete ASU (270 pages) contains useful implementation examples. It is available for download at http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1176156316498#2016
Please let us know if you have any questions about how this pertains to your organization.