Nonprofit leaders must prepare for change as they approach their annual accounting and fulfill their disclosure responsibilities. In August of 2016 the Financial Standards Accounting Board (FASB) released Accounting Standards Update (ASU) 2016-14, Presentation of Financial Statements of Not-for-Profit (NFP) Entities.
The update contains changes in reporting requirements that will significantly affect how NFPs communicate their financial position, with the goal of simplifying net asset classification and providing more useful information to donors, grantors, creditors and others who rely on the data to guide decisions. The new requirements include a number of reporting changes, with many focused on how nonprofits present information about net assets and endowments.
ASU 2016-14 will transform the face of NFP financial statements by requiring entities to present two net asset classes rather than the three required by current GAAP standards. Instead of showing separate classifications for unrestricted, temporarily restricted and permanently restricted net assets, NFPs will divide all assets into one of two categories: those without donor restrictions and those with donor restrictions. The reduction in the number of asset classes is intended to reduce complexity and make it easier for non-accounting professionals to understand NFP financial statements.
To further enhance clarity regarding availability of funds, the updated standards require organizations to disclose the timing and nature of any existing donor restrictions in footnotes to the statement. These disclosures must also include information regarding the composition of net assets with donor restrictions at the end of the financial period and show any analysis of net assets by time, purpose and perpetual restrictions. This change reflects the FASB’s view that changes in state law, along with widespread adoption of the Uniform Prudent Management of Institutional Funds Act (UPMIFA) of 2016, have blurred the distinction between permanent and temporary restrictions.
With a reduced number of asset classes, NFPs will be better able to focus on disaggregating and disclosing the components of their net asset classes based on external donor restrictions and internal board designations. FASB wants to ensure that nonprofits effectively communicate the true availability of assets. To this end, the update requires organizations to disclose board designations on all net assets without donor restrictions, whereas current law requires disclosing such designations only on endowments. Enhanced disclosures regarding amounts and purposes of board designations on funds, optional under current GAAP standards, will become mandatory.
The update includes further changes to the way organizations treat restrictions and related disclosures:
- NFPs must now use the placed-in-service approach when releasing restrictions related to long-lived assets; implying a time restriction and releasing the restriction over an asset’s useful life is no longer permitted.
- Organizations must disclose any governing board actions that result in self-imposed limits on the use of resources in notes to the financial statement.
Reporting and disclosure of endowments will also change as a result of ASU 2016-14. Under existing GAAP standards, underwater endowments (those with a current value that is less than the original gift amount or the amount required to be retained either by the donor or by law) are treated as unrestricted net assets. NFPs present the endowment fund at the amount required to be maintained by the donor or by law, with accumulated losses reflected as a reduction of unrestricted net assets.
The new standard changes this presentation by requiring organizations to include the accumulated losses together with the related fund in the category of net assets with donor restrictions. Expanded disclosure requirements for underwater endowments also include showing the original amount of the endowment, the NFP’s policy relating to spending from these funds, and whether the organization followed that policy in the period being reported.
ASU 2016-14 update will take effect for annual financial statements issued for fiscal years beginning after December 15, 2017, and for interim periods within fiscal years beginning after December 15, 2018. Organizations may choose to apply the new standards to interim financial statements but are not required to do so in the initial year of application, and the FASB will allow early application of the standard.
Given the significant reporting and disclosure changes, NFPs and their auditors should start preparing for these changes now and create an implementation plan to ensure a smooth transition. For detailed information about the updated standards, refer to ASU 2016-14. If you’d like additional support as you approach the many changes it includes, please contact the nonprofit accounting specialists at HBP.