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Not-for-Profit Financial Reporting Guidance issued by FASB

By Linda Marie Pearson, CPA, CFE, Principal

NonProfit Higher Education Fiancial Reporting

After 20 years, FASB has finally addressed expressed concerns about the complexity and limited usefulness of the current not-for-profit financial reporting model by issuing Accounting Standards Update (ASU) 2016-14, Presentation of Financial Statements for Not-for-Profit Entities. The ASU, which affects substantially all NFPs, including charities, foundations, colleges, universities, health care providers, religious organizations, trade association and cultural institutions, simplifies and improves the presentation of financial statements and enhances the disclosures in the notes of how not-for-profits (NFPs) classify their assets.

This should help NFPs reduce costs and complexities in preparing their financial statements while improving the communication of their financial well-being to their stakeholders, including donors, grantors, creditors, and other users.

Changes to qualitative and quantitative requirements are in the following areas:

  • Net asset classes
    • Three net asset classes (unrestricted, temporarily restricted and permanently restricted) will be replaced with two net asset classes: 1) net assets with donor restrictions and 2) net assets without donor restrictions.
    • Temporary restricted and permanently restricted net assets will be combined into one “net assets with donor restrictions class”.
    • NFPs retain current requirements to provide information about the nature and amounts of different types of donor-imposed restrictions in the notes with an emphasis on how and when resources can be used.
    • Restricted contributions (to fund acquisition or construction of long-lived assets) must be fully released when the asset is placed in service. The option to release restrictions over the life of the property has been eliminated.
    • NFPs must disclose the amount and purpose of board designated net assets on the use of funds without donor restrictions.
    • The deficits of underwater amounts of donor-restricted endowment funds must be classified under the new “net assets with donor restrictions” class. Additional disclosures related to underwater endowment funds are required.
  • Investment return
    • NFPs must present the amount of change in each of the two newly combined net asset classes (listed above).
    • Investment return will continue to be presented net of investment expenses, including direct investment-related expenses. The disclosure of the components of investment expense has been eliminated.
  • Expenses 
    • NFPs will continue to report expenses by functional expense classifications.
    • NFPs will be required to provide information about expenses by their nature.
    • NFPs will also be required to provide an analysis of expenses to help users assess how a NFP uses its resources.
    • Enhanced disclosures are also required about the methods used to allocate costs among program and support functions.
  • Liquidity and availability of resources
    • NFPs must disclose any board-designated restrictions as the end of the period.
    • NFPs must disclose qualitative information that communicates how a nonprofit manages its liquid available resources to meet cash needs for general expenditures within one year of the balance sheet date.
    • NFPs must disclose quantitative information the communicates the availability of the NFPs financial assets at the balance sheet date to meet cash needs for general expenditures within one year of the balance sheet date, either on the face of the financial statement and/or in the notes.
  • Presentation of operating cash flows
    • The ASU maintains the option to present operating cash flows using either the direct or indirect method of reporting. Should an NFP choose to use the direct method, then reconciliation of changes in net assets to cash provided (used) in operating activities is no longer required.

The ASU is effective for annual financial statements issued for fiscal years beginning after December 15, 2017, and for interim periods within the fiscal years beginning after December 15, 2018. Application to interim financial statements is permitted but not required in the initial year of application. Amendments in this ASU can be adopted early.

Please contact your Sansiveri not-for-profit specialist with any questions at 401-331-0500.

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