On August 18, 2016, the Financial Accounting Standards Board (FASB)             issued new rules for nonprofits: “Accounting Standards Update 2016-14         “Not-for-Profit Entities (Topic 958), Presentation of Financial Statements of       Not-for-Profit Entities.” This is the first major set of changes to nonprofit           financial statement presentation standards since 1993.  The new rules             take effect for fiscal years beginning after  December 15, 2017

What organizations are affected by the new guidance?

The new rules affect substantially all nonprofit organizations, including charities, foundations, private colleges and universities, health care providers, cultural institutions, religious organizations, and trade associations, among others.

What are the most significant changes?

1.   Under the new rules, the Statement of Financial Position and Statement of Activities will only have two classes of “Net Assets” – net assets with donor restrictions, and net assets without donor restrictions. The footnotes will also be changed to explain these classifications. The goal of this change is to simplify the reports for financial statement users. Other advantages of this change are that the financial statements will now also provide more useful information about the nature, amounts, and types of donor restrictions.  Nonprofits will still have to track net assets and follow any restrictions imposed by donors; however, there is no longer a requirement to distinguish between temporarily and permanently restricted net assets on the face of the financial statements.  Instead, new disclosure requirements will allow nonprofits to provide more useful information about limits placed on net assets by both boards and donors.

2.  The new rules require quantitative and qualitative information to explain how an organization manages its liquid resources available to meet cash needs for general expenditures within one year of the balance sheet date.  The requirement for qualitative information will be satisfied by “classified” presentation on the statement of financial position (e., a breakdown of current and non-current assets and liabilities). The requirement for quantitative information will be satisfied by disclosure of whether or not a financial asset’s availability is limited by a.) its nature, b.) external limits imposed by donors, grantors, laws or contracts, or c.) internal limits imposed by governing boards.  The idea here is to inform the reader of the financial statements about any limitations on the use of liquid assets (typically cash and investments) by the nonprofit. Nonprofit managers should be ready to discuss these restrictions with their CPA performing the audit or review engagement.

3.  The new rules require investment income to be reported net of related internal and external investment expenses (this is currently optional), but also eliminate the related requirement to disclose the amount of those netted investment expenses.  The result of this change is not only a consistent presentation across nonprofit entities, but also it gets rid of the difficulty and costs associated with identifying embedded investment fees in the investment returns used by some nonprofits, such as mutual funds and hedge funds.  Despite this change, nonprofit leaders should continue to make sure they are aware of the amount paid by the nonprofit for investment management fees.

4.  The new rules continue to allow nonprofits the freedom to choose to present operating cash flows using either the direct or indirect method (whichever method best serves the informational needs of those reading the nonprofit’s financial statements).  However, the new rules eliminate the requirement to present or disclose the indirect method in the notes if the direct method is presented on the statement of cash flows. The result is anticipated to be a more useful statement of cash flows and a reduction in costs to prepare the financial statements.

5.  The guidance also requires that all nonprofits report expenses by both their natural classification and functional classification. Currently this is required only for voluntary health and welfare organizations; other organizations are permitted to disclose expenses by function in summary form in the notes.

6.  The guidance finally requires enhanced disclosures about endowment funds, method of allocating costs by function and net assets.

Why do these changes matter?

These changes will not materially affect how nonprofit finance teams handle underlying transactions; but staff will need to be ready to explain the difference in the look of the financial statements they present to the board and grantmakers. Also, board members will need some training on the new rules as they pertain to their particular organization’s financial statements. Consider asking your nonprofit’s auditor to explain the impact of the new rules to your board of directors.

When are the new FASB standards effective?

There is still plenty of time before the new rules go into effect. Talk to your auditor about the potential impact on audited financial statements. The new standards apply to annual financial statements issued for fiscal years beginning after December 15, 2017. Early application is permitted.

 

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