Fully comprehending the substance of a Not-for-Profit (“NFP”) entity’s financial statements can be a difficult task for an external user. In fact, current reporting requirements raise many questions for both external users and board members alike, such as:
- What is or is not donor restricted, and are those restrictions temporary or permanent?
- How do restrictions imposed by donors, grantors, and governing boards affect an entity’s liquidity, classes of net assets, and financial performance?
- How should users make sense of inconsistencies in the type of information provided about expenses of the period?
The Financial Accounting Standards Board (“FASB”) hopes to have clarified and improved NFP financial statements for all users with Accounting Standards Update (“ASU”) No. 2016-14, which was issued in August 2016. The main objective of this ASU is to provide more useful and consistent information to financial statement users from donors, grantors, creditors, or other users, and enable organizations to be more transparent in sharing the results of their mission. Although, this ASU is effect for fiscal years beginning after December 15, 2017 (with early adoption permitted); there are several key provisions that we believe NFP entities should be aware of now.
First, NFP entities will present two classes of net assets on their financial statements, rather than for the currently required three classes. In other words, rather than presenting Unrestricted, Temporarily Restricted, and Permanently Restricted classes, upon adoption of the ASU NFPs will report amounts for net assets “With Donor Restrictions” and “Without Donor Restrictions”. Disclosures describing the nature and amounts of different types of donor restrictions will still be required. Additionally, under-water amounts of donor restricted endowments will be classified under net assets with donor restrictions.
Additionally, all NFP entities will be required to present expenses by both their natural and functional classifications, provided in one location, which could be on the face of the statement of activities, as a separate statement, or in notes to financial statements. NFPs will also be required to disclose the method(s) used to allocate costs among program and support functions. It should be noted in the first year of applying this ASU, a NFP entity may omit comparative information for any periods presented before the adoption.
The ASU also provides for disclosures specifically regarding qualitative and quantitative information on the NFP’s liquidity and availability of resources for one year from the date of the statement of financial position. These disclosures will provide financial statement users with meaningful information regarding the NFP’s ability to meet cash needs within one year of the balance sheet date. Similar to the functional expense requirement, NFPs may omit comparative information in the first year of adoption.
NFP entities will continue to have the choice in using the direct or indirect method of reporting for the statement of cash flows. If the direct method is utilized, the reconciliation of changes in net assets to cash provided by operating activities is no longer required.
The summary above is not all-inclusive of the updates; however, please contact a member of the Whitley Penn Not-for-Profit team who will be glad to guide you through these and the other changes discussed in the ASU. We can work together to improve the classification, presentation and disclosures in your NFP’s financial statements.
For more information please contact Susan Powell or Kimberly DeWoody.
Fort Worth Office