It’s been talked about for many months now and the new FASB guidelines for nonprofit organizations are here – or at least the first phase.
We sat in on the FASB webcast “IN FOCUS: Accounting Standards Update on Not-for-Profit Financial Statements (ASU 2016-14)” and here are the key takeaways from the presentation.
The key objectives recommended by FASB’s NFP Advisory Committee (NAC) are as follows:
• Update, not overhaul, the current model
• Improve net asset classification scheme
• Improve information in financial statements and notes about:
- Financial performance
- Cash flows
- Liquidity
• Better enable NFPs to “tell their financial story”
So, what has changed?
Phase 1 ASU 2016-14 issued in August 2016 has five areas requiring change.
Net Asset Classes – New FASB Guidelines for Nonprofit Organizations
The first area covered is Net Asset Classes, specifically the classification scheme, disclosure of board designated net assets, underwater endowments, and expirations of capital restrictions.
Another net asset classes change requires disclosure of board designated net assets.
“Underwater” Endowments with revised net asset classification and enhanced disclosures and was defined this way:
Revised net asset classification: to be reflected in net assets with donor restrictions rather than in net assets without donor restrictions.
Enhanced disclosures: in addition to aggregate amounts by which funds are underwater (current GAAP), also disclose aggregate of original gift amounts (or level required by donor or law) for such funds, fair value, and any governing board policy, or actions taken, concerning appropriation from such funds.
Expiration of Capital Restrictions is the final area impacted by net asset classes requirements. When it comes to gifts of cash restricted for acquisition or construction of PP&E (property, plant, and equipment), in the absence of explicit donor restrictions, NFPs would be required to use the placed-in-service approach (no more implied time restrictions). This is something nonprofit healthcare organizations are already required to do.
Expenses/Investment Return – New FASB Guidelines for Nonprofit Organizations
Expense Reporting
The new guidelines are looking to create better, more consistent information about expenses. Nonprofits are required to report expenses, either on the face of the financial statements or in the notes by Function (currently required in GAAP), Natural classification, and Analysis (disaggregate function by nature).
Nonprofit organizations are required to provide qualitative disclosures about methods used to allocate costs among program and support function. ASU also provides enhanced guidance on allocations from M&G expenses.
Reporting of Investment Return
Net presentation of investment expenses against investment return on the face of the statement of activities:
• Netting limited to external and direct internal expenses
• May report net return in multiple, appropriately labeled lines. For example, from different portfolios, in different net asset classes, or in operation versus non-operating
Disclosure of investment expenses no longer required (if reported, carefully label and don’t include in expense analysis). Also, it is no longer required to disclose investment return components.
Operating Measures – New FASB Guidelines for Nonprofit Organizations
Reinforcing current GAAP requirement about transparency of components of any operating measures presented:
Nonprofit organizations utilizing an operating measure that reflects governing board designations, appropriations, and similar actions (internal transfers) must report these types of internal transfers appropriately disaggregated and described by type (either on the face of the statement of activities or in the notes).
Liquidity/Availability – New FASB Guidelines for Nonprofit Organizations
When it comes to liquidity and availability of resources, nonprofit organizations are required to provide:
Qualitative information on how the organization manages its liquid available resources and its liquidity risk (in the notes).
Quantitative information that communicates the availability of an organization’s financial assets at the balance sheet date to meet cash needs for general expenditures within one year (on the face and/or in the notes).
Statement of Cash Flows – New FASB Guidelines for Nonprofit Organizations
Cash flow statement guidelines will continue to allow a choice between the Direct Method and the Indirect Method in presenting operating cash flows. However, indirect reconciliation is no longer required for Direct Method.
Summary – New FASB Guidelines for Nonprofit Organizations
The effective date for Phase I Accounting Standards Update on Not-for-Profit Financial Statements (ASU 2016-14) will be for organizations with fiscal years beginning after December 15, 2017 (for example calendar year 2018, fiscal year 2018-19) with interim financials the following year.
The rollout of Phase II is still to be determined. Some of the issues under consideration for Phase II include: whether to require a measure of operations; how to define a measure of operations; potential realignment within the statement of cash flows; and segment reporting for nonprofit health care entities.