The Financial Accounting Standards Board (FASB) has issued an Accounting Standards Update (ASU) with some key changes in reporting standards for not-for-profit and health care organizations. ASU 2016-14: Not-for-Profit Entities (Topic 985): Presentation of Financial Statements of Not-for-Profit Entities contains targeted improvements to the existing framework and can be made without high costs. These improvements were requested by FASB’s Not-for-Profit Advisory Committee (NAC) and are designed to provide decision-useful information to donors and other users of the financial statements.
Here’s what you need to know about the new accounting standards and how they’ll affect your organization’s financial statements.
Previously not-for-profits were required to classify their net assets in one of three ways based on donor-imposed restrictions: unrestricted, temporarily restricted, and permanently restricted. Under the new standards, only two classifications of assets will be required to be reported in the financial statements – assets without donor restrictions and assets with donor restrictions. The distinction between permanent restrictions and temporary restrictions has been lifted in the name of simplicity. Organizations will, however, be required to include useful information regarding restrictions through enhanced footnote disclosures. The hope is that these changes make financial statements simultaneously easier to read and more transparent.
According to Russell Golden, an FASB Chairman, “The new guidance simplifies and improves the face of the financial statements and enhances the disclosure in the notes.”
In the past, creditors and donors have had difficulty assessing a not-for-profit’s true liquidity due to inconsistencies in reporting. The new standards will eliminate inconsistencies, and show liquidity more clearly by providing enhanced footnote disclosures that better illustrates immediate cash requirements, limitations on the uses of reported assets, and how a not-for-profit manages liquidity.
Statements of Activities
Under the new standards, activities will no longer have to be reported based on the three categories of net assets but will instead be reported using the two classes of net assets mentioned above. In addition, the statement of activities will now include two subtotals. One indicating operating revenues, support and restrictions without donor-imposed restrictions, and the other including the effect of internal transfers resulting from governing board designations, appropriations, transfers, etc.
Reporting Cash Flow
Cash flows are no longer required to provide a reconciliation of operating cash flows utilizing the indirect method if the direct method is elected. The direct method of reporting is encouraged, but preparers continue to have the option to utilize whichever option they deem appropriate. If the direct method is elected, the elimination of the requirement to present cash flows using the indirect method reduces the costs of preparing two cash flow statements. In addition, the new guidelines address the classification of certain transactions, such as those involving long-lived assets, interest on borrowings, receipt of interest and dividends, in the cash flow statement.
ASU 2016-14: Not-for-Profit Entities (Topic 985): Presentation of Financial Statements of Not-for-Profit Entities is effective for annual reporting periods beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018.
For additional information on this new pronouncement, contact Amanda Kumma-Reeves at email@example.com or 816-743-7700.