In August 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-14 “Presentation of Financial Statements of Not-for-Profit Entities”.
Why a new standard?
The new standard is the first step to improve not-for-profit financial statements and to provide more useful information to donors, grantors, creditors, and other users of the statements. It also attempts to reduce the cost and complexity for preparers and users of financial statements.
Specific problems the new standard sets out to address:
- Liquidity – It was difficult for users of the financials to determine liquidity and to compare liquidity among nonprofit organizations.
- Net Asset Restrictions – The three classes of net assets were confusing to general users of the financials. The term “unrestricted” was misunderstood by the public. It was not clear how restrictions or limits by donors, grantors, laws, contracts, and the nonprofit’s own Board were reported and disclosed in the financials.
- Expenses – Not all nonprofits were reporting the same level of expense detail.
- Cash Flow – The required cash flow method (indirect) was confusing to general readers.
How will this impact my organization?
In general, the new standard will not require additional accounting or tracking. It simplifies and asks for a more consistent financial statement presentation. The most impactful change may be the new liquidity calculations and disclosure that will be required.
Main provisions of the ASU:
Liquidity Disclosure – Requires qualitative information that communicates how the nonprofit manages the liquid resources available to meet its cash needs within one year. Requires quantitative information that communicates the availability of the nonprofit’s financial assets within one year. Availability of assets may be affected by their type/nature, external limits (by grantors, donors, laws, etc.) and internal limits (Board designations).
Net Asset Classes and Disclosures – The three current classes of net assets (unrestricted, temporarily restricted and permanently restricted) will be condensed into two (net assets with donor restrictions and net assets without donor restrictions) on the face of the financial statements. Disclosure of much of the current detail will still be required in the footnotes in order to help users understand the composition of net assets and how the restrictions affect the use of resources. More specific quantitative and qualitative disclosures of Board designated net assets will also be required.
Expenses by Function – Disclosure of expenses by natural and functional categories and expanded disclosure of the method(s) used to allocate costs among program and support functions will be required.
Investment Expenses – Currently, investment fees are often segregated from investment income. Under the new ASU, investment return will be netted with investment fees and only the net income will be reported.
Cash Flows – Nonprofits will have the flexibility to present operating cash flows using either the direct or indirect method. Currently, the indirect method, otherwise known as reconciliation, is required.
The ASU includes other enhanced disclosures, including underwater endowments. The disclosure flexibility around the release of donor-imposed restriction over the estimated useful life of a long-term asset has been removed. Nonprofits will be required to use the placed-in-service approach for reporting expirations of restrictions on gifts.
What is the timeline?
The effective date of the ASU is for fiscal years beginning after December 15, 2017, with early adoption permitted. A second phase is expected in the future to address measures of operations (or financial performance) on the statements of activities and cash flows.
How can Jacobson Jarvis help?
Jacobson Jarvis will be working with our clients in the upcoming year to identify the ASU provisions that are the most significant to your financial statements and to draft a new liquidity footnote for early review and analysis by management and the Board.
If you have questions or want help to understand how this new guidance will impact your organization, please contact us. We are happy to walk you through the guidance in a user-friendly way that considers practical considerations and how your updated financial statements will portray your organization to donors, funders and other readers.
About the authors:
Julleen Snyder, CPA, Partner, has been with Jacobson Jarvis since 1995. She has both practical experience working within a not-for-profit organization, as well as a solid background in accounting and auditing. This multi-disciplinary experience provides her with a unique perspective of the client’s issues combined with the ability to implement timely, appropriate solutions. Julleen can be contacted via email at firstname.lastname@example.org.
Erin Welch, CPA, Partner, has worked as a consultant and auditor to not-for-profit organizations since 2000. She helps clients improve their internal controls and processes, conducts financial health assessments, assists clients with board communications, and conducts board trainings. Erin can be contacted via email at email@example.com.
Matt Cyr, CPA, Audit Manager, has been a nonprofit auditor since 2007. Matt focuses on providing attestation services to a wide range of not-for-profit organizations. He also has an extensive background in employee benefit plan audits. Matt can be contacted via email at firstname.lastname@example.org