Nearly two years ago today, the Financial Accounting Standard Board (FASB) introduced significant changes to the financial statement of not-for-profit entities through the Accounting Standards Update (ASU) 2016-14. This update implements notable changes to the face of financial statements for not-for-profits, as well as, the related footnote disclosures.
The effective date for the standard is for fiscal years beginning after December 15, 2017, which impacts fiscal years ending December 31, 2018, and June 30, 2019. In this blog, we’ll highlight the top five areas that we believe will have the most significant impact on your organization.
Net Asset Classifications
Currently, there are three classes of net asset classifications; unrestricted, temporarily restricted, and permanently restricted. Under the new Presentation of Financial Statements, the net asset classifications will become two:
- Net Assets without Donor Restrictions
- Net Assets with Donor Restrictions
Also, underwater endowments (those that have a current fair value less than the original gift amount) will be disclosed in net assets with donor restrictions (mentioned above), and disclosures will be required to include:
- The Original Amount of Endowment
- How Your Organization Plans to Distribute the Funds
- Confirmation of Protocol
Under the new ASU 2016-14, Nonprofits are required to include Quantitative and Qualitative descriptions of their liquidity in the footnotes to the financial statements, providing transparency and an understanding of your risk exposure, amongst other things.
Functional and Natural Expense Classifications
Effective with the new update, all nonprofit organizations will be required to provide an analysis of both functional and natural expense classifications within the footnotes or the financial statements, as well as, disclosures that offer insight into the program’s specifications including intended allocation costs and support functions.
Presentation of Investment Expenses
Investment fees are now required to be presented net against investment return on the face of the financial statements. This includes both external and direct internal investment-related expenses.
Statement of Cash Flows
For the Statement of Cash Flows, not-for-profit organizations still have the option to present either the direct or indirect method; however, those that choose to present using the direct method will no longer be required to include an indirect method reconciliation.
So, much change is happening; those are the five big ones that I just went over. I’m going to be going over these in more detail during an upcoming webinar where we’ll dig into these changes a little further, discuss their intended impact and how to go about implementing these changes. We haven’t seen significant changes like these to financial statements in a long time, so it’s important for your organization to start preparing, since all of these changes take effect with fiscal years beginning after December 15, 2017. SO RIGHT NOW.