Key Amendments to Improve Not-for-Profit Financial Reporting
Presentation of Financial Statements of Not-for-Profit Entities which is aimed to improve not-for-profit financial reporting and provide more useful information to donors, grantors, creditors and other financial statement users. The update will change the way all not-for-profits classify net assets and prepare financial statements and is effective for annual financial statements issued for fiscal years beginning after December 15, 2017.
A summary of some of the key amendments follows.
LIQUIDITY INFORMATION
ASU 2016-14 includes specific disclosure requirements aimed at providing more useful information that will be helpful in assessing a not-for-profit’s (NFP’s) availability of resources to meet cash needs for general expenditures and overall liquidity and financial flexibility. The disclosures include:
- The total amount of financial assets at the end of the period;
- Amounts that are not available to meet cash needs within an entity defined time horizon;
- The total amount of financial liabilities that are due within that time horizon.
EXPENSE CLASSIFICATION
The new guidance requires expenses to be reported by nature and function in a single location on the financial statements. This information can be presented on the statement of activities, on a separate statement, or in a schedule in the notes to the financial statements. NFP’s are also required to disclose the method used to allocate costs among programs and support functions.
PRESENTATION OF INVESTMENT EXPENSES
Requires not-for-profits to disclose investment expenses net of investment returns on the face of the statement of activities. The netted amount may be reported on multiple lines over the statement. A disclosure of the components of investment expense will no longer be required.
PRESENTATION OF CASH FLOW INFORMATION
A not-for-profit may choose to report cash flows from operating activities either using the direct or indirect method. If the direct method is used, a reconciliation to the indirect method may be reported, but is no longer required.
NET ASSET CLASSIFICATIONS
On the statement of financial position, ASU 2016-14 replaces the three classes of net assets known as unrestricted, temporarily restricted and permanently restricted with two new classes called net assets with donor restrictions and net assets without donor restrictions. These classifications are based on the absence or presence of donor-imposed restrictions.
UNDERWATER ENDOWMENTS
The new guidance enhances the classification and disclosure of underwater endowment funds. Underwater endowment funds occur when the fair value is less than the original gift amount, amounts required by law, or amounts required to be maintained by the donor. NFP’s will now be required to disclose not only the aggregate amounts by which funds are underwater, but also disclose the aggregate of the original gift amounts (or level required by donor or law) for such funds, its fair value, and any governing board policy or decision to reduce or not spend from such funds.
GIFTS OF LONG-LIVED ASSETS
Under this new guidance, NFP’s are now required to treat capital gifts of long-lived assets without donor restrictions utilizing a placed-in-service approach where unrestricted gifts are reported within operations and the entire amount is to be transferred out of current operations when the gifted asset is placed in service. Gifts of cash restricted for acquisition or construction of long-lived assets will now be required to be reported as revenues that increase net assets with donor restrictions during the initial period and ultimately released into operations once donor restrictions are satisfied.
EFFECTIVE DATE AND ADOPTION
The amendments in this ASU 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. Early application of the amendments is permitted.
The amendments should be applied on a retrospective basis in the year that the new ASU is first applied. However, if presenting comparative financial statements, a not-for-profit entity 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 (the separate presentation of expenses by functional classification and expenses by natural classification is still required). NFPs that previously were required to present a statement of functional expenses do not have the option to omit this analysis; however, they may present the comparative period information in any of the formats permitted in this new ASU, consistent with the presentation in the period of adoption.
- Disclosures about liquidity and availability of resources.
In the period of adoption, a not-for-profit is required to disclose the nature of any reclassifications or restatements and their effects, if any, on changes in the net asset classes for each period presented.
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