A little over a year ago, we wrote about the FASB changes in store for nonprofit organizations, noting that it had been two decades since the Financial Accounting Standards Board (FASB) had made any reporting requirement changes for nonprofits.
The first phase of changes were announced in August and are on the record and will be the standard for fiscal years beginning after December 15, 2017, with a second round of changes to follow sometime in the near future.
With regard to implementation of the new standards, the Nonprofit Quarterly reported that, “For calendar year organizations, that will be calendar 2018. For fiscal year organizations, which typically end on June 30th, it will be the fiscal year beginning July 1, 2018. However, early adoption is allowed, and that means you don’t have to wait for these years. If an organization wants to implement it for calendar 2017, they can do so and take 2016, the year we’re in, as a sort of mock period just to implement what it would look like.”
In a statement, FASB Chairman Ronald Goldman summed up the objectives of the new guidelines by saying, “While the current not-for-profit financial reporting model held up well for more than 20 years, stakeholders expressed concerns about the complexity, insufficient transparency, and limited usefulness of certain aspect of the model.” He went on to say that, “The new guidance simplifies and improves the face of the financial statements and enhances the disclosures in the notes.”
Bulleting out 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
- Better enable NFPs to “tell their financial story”
Phase 1 ASU 2016-14 issued in August 2016 has five areas requiring change.
Change Area 1 – Net Asset Classes
In the past, the statement of activities had three columns representing three categories of assets: restricted, temporarily restricted, and permanently restricted. Under the new requirements, there will only be two columns, representing two classes of net assets “With donor restrictions” and “Without donor restrictions” – the goal being to simplify what in the past may have been a more complicated presentation.
Another net asset classes change requires disclosure of board designated net assets.
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.
Change Area 2 – Expenses/Investment Return
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 is 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.
Change Area 3 – Liquidity/Availability
This addresses the reporting of data that goes directly toward understanding the financial health of the organization and the ability to meet the organization’s operations cash requirements.
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).
Change Area 4 – Operating Measures
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).
Change Area 5 – Statement of Cash Flows
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.
Xanegy can help you prepare for the changes. If you have been considering a change to your nonprofit accounting software, in light of new FASB guidelines sooner may be better than later. We are happy to show you how new software can make compliance easier.
Because of Intacct’s dimensional design, these changes are very easy to accommodate. It will allow you to easily track by restriction types, and summarize your reporting data.
Senior Product Marketing Manager for Intacct, Joan Benson writes about the new FASB standards here.
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 yet 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.
Stay tuned for more information on Phase II.
Other resources for nonprofits from Xanegy:
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