With the Accounting Standards Update issued by the Financial Accounting Standards Board (FASB) in 2016 came a host of new financial reporting requirements and changes that impact nonprofit organizations. ASU 2016-14, as the update is officially titled, makes a wide variety of changes to financial statements and requires additional disclosures regarding functional expense reporting; net assets and endowments; and liquidity and availability of assets.
In addition to these areas, the update revises reporting standards for intermediate measures of operations. Such measures include operating income or loss, results of operations and excess or deficit of operating revenue over operating expenses.
ASU 2016-14 reinforces the current GAAP requirement regarding transparency of the components of any operating measures presented. Under the updated standard, two different situations require nonprofit organizations to provide details in the footnotes to financial statements.
- If…the financial statement of activities does not provide clarity regarding the organization’s use of the term “operations” on the face of the statement, then…the organization must disclose details of the reported measure of operations and, where applicable, explain what the term “operations” includes/excludes.
- If…the face of the financial statement includes internal board designations, appropriations and similar actions, then…the organization must provide information that describes the designation, appropriation or other action.
The ASU is effective for fiscal years beginning after December 15, 2017, and for interim periods within fiscal years beginning after December 15, 2018. The amendments for intermediate measures of operations should be applied retrospectively, meaning they should be applied to the prior year information as well as the current year information for comparative purposes.
To ensure timely compliance and avoid potential difficulty in reconciling changes after the fact, nonprofit leaders may benefit from monitoring their boards of directors’ ongoing deliberations of potential changes to how operating results are presented in the financial statements.
More specific rules governing how nonprofit organizations should define and treat intermediate measures of operations will appear in Phase 2 of the ASU. This second phase of the update will address topics that include when or if to require intermediate measures, what must be included, how to define “operations” in the first place and how to align measures of financial operations between statements of activities and statements of cash flow. At this point the FASB has not provided a time frame for completing Phase 2.
Now, however, it is time to prioritize understanding and complying with the required changes that have already been set forth. Although most NFP leaders are aware of ASU 2016-14, many have not explored what it means in the context of their organization and taken the necessary steps to enable compliance. If your organization could benefit from expert assistance in determining your responsibility under the new standards and implementing the accounting changes they require, please reach out to the nonprofit accounting professionals at HBP.