Changes to Not-For-Profit Financial Statements
Posted Oct 11, 2016
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The Financial Accounting Standards Board (FASB) introduced changes to not-for-profit accounting [Accounting Standards Update (ASU) No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities] on August 4, 2016, with the intention that these changes could more easily explain the purpose and mission of each organization via their financial statements.
The proposed changes will add detail to financial statement presentation and disclosure requirements that will deliver more value to not-for-profit stakeholders.
FASB Chairman Russell Golden released the following statement:
“While the current not-for-profit financial reporting model held up well for more than 20 years, stakeholders expressed concerns about the complexity, insufficient transparency, and limited usefulness of certain aspects of the model. The new guidance simplifies and improves the face of the financial statements and enhances the disclosure in the notes.”
Along with added disclosure and more detailed presentation, the following changes will also be implemented:
- Expenditures will now be reported and analyzed by “function and nature”.
- Donor-restricted endowment funds that are considered “underwater” within net assets are now required to be reported as such.
- The ASU will continue to allow not-for-profit entities to choose between the direct and indirect methods of cash flow computation, thus eliminating the need for those who use the direct method to reconcile to the indirect method.
- Finally, the new ASU requires that not-for-profit entities disclose notes of qualitative information. They will be required to disclose how they manage their assets, as well as their plans to mitigate liquidity risk. Not-for-profits are required to communicate the availability of funds to meet expenditures within a year’s-worth time span on the face of the financial statements or in the notes.
While these changes may mean more work for our not-for-profit clients, there is still time to get ready for them. The standard takes effect 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. Please note that early application of this standard is permitted.
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