On Aug. 18, 2016, the FASB issued Accounting Standard Update 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities. The update was designed to improve existing standards, and is eligible to be tested on the CPA Examination in January 2018.
This guidance is the first major change to not-for-profit (NFP) financial statement presentation standards since 1993, and is a result of feedback from stakeholders that NFP standards could be improved to provide better information to donors, grantors, creditors, and other financial statement users. NFPs include but are limited to charities, foundations, private colleges and universities, nongovernmental health care providers, cultural institutions, religious organizations, and trade associations.
ASU 2016-14 improves the current net asset classification requirements, as well as the information presented in the financial statements and notes that is useful in assessing a not-for-profit’s liquidity, financial performance, and cash flows. Specifically, the following issues are addressed:
- Net asset classification
- Information about liquidity and availability of resources
- Information about expenses and investment return
- Presentation of operating cash flows
- Net asset classification
The ASU replaces the existing three classes of net assets (unrestricted, temporarily restricted, and permanently restricted) with two new classes of net assets—net assets with donor restrictions and net assets without donor restrictions. NFPs will present:
- on the face of the statement of financial position amounts for net assets with donor restrictions and net assets without donor restrictions, as well as the currently required amount for total net assets.
- on the face of the statement of activities the amount of the change in each of the two classes of net assets rather than that of the currently required three classes. NFPs will continue to report the currently required amount of the change in total net assets for the period.
The ASU also:
- changes the net asset classification of the underwater amounts of donor-restricted endowment funds and requires additional disclosures for underwater endowment funds.
- eliminates the over-time approach for reporting the expiration of restrictions on gifts of cash or other assets to be used to acquire or construct a long-lived asset in favor of the placed-in-service approach (in the absence of explicit donor stipulations). The placed-in-service approach will improve comparability and better reflect the economics of such transactions.
Information about liquidity and availability of resources
The ASU requires:
- qualitative information that communicates how a NFP manages its liquid available resources to meet cash needs for general expenditures within one year of the balance sheet date.
- quantitative information that communicates the availability of a NFP’s financial assets at the balance sheet date to meet cash needs for general expenditures within one year of the balance sheet date.
- Information about expenses and investment return
- all NFPs to provide expenses by both their function (required by current GAAP) and their nature, as well as an analysis of expenses by both function and nature, on the face of the statement of activities, as a separate statement, or in the notes to the financial statements. This reporting requirement will add information useful to donors, grantors, creditors, and others in understanding a NFP’s expenses and in assessing the degree to which the expenses are fixed or discretionary; how the related resources are being allocated; and the costs of the services provided.
- all organizations to present investment return net of all related external and direct internal expenses, while eliminating the currently required disclosure of those netted expenses. This will also eliminate the difficulties and related costs in identifying embedded fees and the resulting inconsistencies in the reported amounts of investment expenses.
Presentation of operating cash flows
The ASU allows NFPs to continue to present the net amount of operating cash flows using either the direct or indirect method of reporting, while no longer requiring the presentation or disclosure of the indirect method reconciliation if using the direct method. This provides an opportunity for some NFPs to reduce costs and to present information about cash flows in a way that may increase the understandability and usefulness to financial statement users.
ASU 2016-15 is effective for annual financial statements issued for fiscal years beginning after December 15, 2017. Accounting pronouncements are eligible to be tested on the CPA Examination in the later of (1) the first testing window beginning after the pronouncement’s earliest mandatory effective date or (2) the first testing window beginning six months after the pronouncement’s issuance date; ASU 2016-14 will become testable in January 2018.
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