On August 18, 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-14. This will change the way financial statements and disclosures are currently presented. The purpose of the standard is to improve the current net asset classification requirement and information presented in financial statements, along with the notes about a not-for-profit entity’s liquidity, financial performance, and cash flows. These changes are the result of FASB’s efforts in the first of two phases of its project. The second phase is expected to address issues on how to define operations and align measures of operations in the statement of activities with measures in the statement of cash flows.
What is Changing (Phase 1)?
The final guidance requires organizations to present two classes of net assets (net assets with donor restrictions and net assets without donor restrictions) on the face of the financials, rather than the currently required three classes (unrestricted, temporarily restricted, and permanently restricted).
Organizations can continue to use either the direct or indirect method of reporting for the statement of cash flows. However, the presentation or disclosure of the indirect method (reconciliation) is no longer required if using the direct method.
Organizations will be required to provide enhanced disclosures on the following:
- Amounts and purposes of board designated net assets.
- Composition of net assets with donor restrictions and how the restrictions affect the use of resources.
- Qualitative information on how the organization manages its liquid resources available to meet cash needs for general expenditures within one year of the statement of financial position date.
- Quantitative information on the availability of the organization’s financial assets available to meet cash needs for general expenditures within one year of the statement of financial position date. This can be affected by the nature, external limits imposed by donors, grantors, laws or contracts, and internal limits imposed by the governing board.
- Amounts of expenses by both their natural and functional classifications. This is to be provided in one location, either on the face of the statements, as a separate statement, or in the notes to the financials. This will now be a requirement for all not-for-profit organizations, not just voluntary health and welfare organizations.
- Methods used to allocate costs among program and support functions.
- Disclosures on underwater endowment funds including:
- The organization’s policy and any action taken during the period concerning appropriation from underwater endowment funds.
- The aggregate fair value of such funds.
- The aggregate of the original gift amounts to be maintained.
- The aggregate amount by which the funds are underwater (have a deficiency), which are to be classified as part of net assets with donor restrictions.
Organizations will report investment return net of external and direct internal investment expenses and are no longer required to disclose those netted expenses.
Organizations must use the placed-in-service approach (in the absence of explicit donor stipulations) for reporting expirations of restrictions on gifts to be used to acquire or construct long-lived assets and reclassify any amounts from net assets with donor restrictions to net assets without donor restrictions. This eliminates the option to release the donor-imposed restriction over the estimated life of the acquired asset.
Effective Date and Application
The amendments in ASU 2016-14 are effective 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. Application to interim financial statements is permitted, but not required in the initial year of application.
The amendments are applied retrospectively in the year the update is first applied. However, if presenting comparative financial statements, the organization has the option to omit the following information for any periods presented before the period of adoption:
- Analysis of expenses by both natural classification and functional classification. If the NFP was previously required to present this information, they do not have the option to omit this analysis.
- Disclosures about liquidity and availability of resources.
Early application is permitted.