Your attention, please, non-profit organizations. If you haven’t yet complied with the Financial Accounting Standards Board (FASB) Accounting Standards Update 2016-14, you need to know that your financial reporting life has changed.
Accounting Standards Update 2016-14, Presentation of Financial Statements for Non-Profit Entities, is the biggest change in non-profit (NFP) accounting standards in a couple of decades, and effective for fiscal years beginning after Dec. 2017. If yours is an organization for which an audited financial statement is prepared, it’s likely you fall under the reporting requirements of ASU 2016-14.
ASU 2016-14, all 264 pages of it, is described by the American Institute of Certified Public Accountants (AICPA), as an effort to make improvements in the following five areas:
- Complexity in net asset classification
- Clarity of information regarding liquidity and availability of resources
- Transparency in reporting of financial performance measures
- Consistency in reporting expenses by function and nature
- Utility of the statement of cash flows
The improvements are intended, says FASB, “to provide more useful information to donors, grantors, creditors, and other users of financial statements,” and that it applies to “charities, foundations, colleges and universities, health care providers, cultural institutions, religious organizations, and trade associations, among others.”
Among the key ASU 2016-14 provisions in terms of upgrading NFP financial information and disclosure:
- Net asset classifications have been reduced from three – unrestricted, temporarily restricted, and permanently restricted – to two: net assets with donor restrictions and net assets without donor restrictions. The previous system was causing confusion in whether donor imposed restrictions were or weren’t in place, and if the restrictions were temporary or permanent. Now, the focus is on a restriction’s existence rather than its type.
- The direct or indirect reporting methods can still be used for stating operating cash flow net amounts; reconciliation between the two methods is no longer necessary.
- Reporting is sharpened concerning governing board decisions that limit self-imposed restrictions of various NFP resources not under donor imposed limits.
- Better information must be made available about net assets with donor restrictions and how the restrictions affect resources use.
- Quality improvements were made on disclosing how liquid resources are managed to meet general expenditure cash needs – either on the balance sheet or in accompanying notes – and on the organization’s financial assets to meet cash needs.
- More detail is required on expense amounts by their natural and functional classifications, and then only in one location within the financial statement.
- Underwater endowment funds: Four elements involve an underwater endowment fund (a fund is underwater when its investment assets have fallen below legal or donor requirements). Disclosure is required of NFP policies or actions concerning appropriations from an underwater fund and the aggregates of the fund’s fair value and original gift amount or legal or donor-directed amounts; and fund deficiencies will be classified as net assets with donor restrictions.
As mentioned earlier, the complete ASU is 264 pages in length, with highly detailed descriptions of each stage of the new order of NFP disclosure and reporting business. Failure to comply with ASU 2016-14 potentially carries some stiff penalties.
NFPs with fiscal years that ended in 2018 should know about ASU 2016-14. If not, that’s a problem. NFPs with fiscal years that began in 2018 and end in 2019 might be behind as well.
If you are working with an accounting professional and you weren’t aware of the ASU, you might ask why, or what is your organization’s compliance level with ASU 2016-14. If you don’t have an experienced accounting consultant working with you on these subjects, now’s a good time to find one.