By Gregory S. Dowell
August 9, 2018
Back in 2016, an audit standard was adopted by the Financial Accounting Standards Board (ASU 2016-14), which makes changes to the financial statements for virtually every nonprofit organization. Because the implementation date was delayed, this standard has not received much attention by nonprofit organizations. However, the standard will make these changes mandatory and will affect the 2018 financial statements of many nonprofits. Nonprofits should also be aware that implementing these standards may come at a cost – both internally (in their accounting department or requiring more time from volunteers), or externally (as external auditors have to implement the changes to the financials).
The goal of the standard is clarity; the effort is to make the financial statements (and the organization’s financial position) more clear and understandable to the reader, user, donor, creditor, etc.
The following is a brief overview of the changes resulting from ASU 2016-14:.
Net Asset Classification: The new guidance will require your financial statements to present the amount for each of two classes of net assets on the face of the statement of financial position, as follows:
- net assets with donor restrictions
- net assets without donor restrictions
The previous categories of temporarily and permanently restricted net assets are no longer presented, but are combined into a single category. To enhance readers’ understanding of the donor restrictions, footnote disclosures will be required to include the timing and nature of the restrictions, as well as the composition of net assets with donor restrictions at the end of the period. The disclosures will continue to show an analysis by time, purpose, and perpetual restrictions.
Underwater Endowments: As part of the change to classification of net assets, endowments that have a current fair value that is less than the original gift amount (or amount required to be retained by donor or by law), known as underwater endowments, will now be classified in net assets with donor restrictions, instead of the current classification in unrestricted net assets. Expanded disclosures will be required to include the following information:
- The original amount of the endowment
- The NFP’s policy relating to spending from these funds
- Whether that policy was followed
Board-designated Net Assets: At times, an NFP’s governing board may make designations or appropriations that result in self-imposed limits on the use of resources without donor restrictions, known as board-designated net assets; enhanced disclosure information will be required on the amounts and purposes of these designations. In addition, the placed-in-service approach will be required when releasing restrictions related to long-lived assets. The option to imply a time restriction and release the restriction over an asset’s useful life will no longer be permitted.
Information about Liquidity: NFPs will be required to disclose both quantitative and qualitative information about the availability of and how the NFP manages its liquid available resource to meet cash needs for general expenditures within one year of the balance sheet date. The goal of this change is to improve the ability of financial statement users to assess the NFP’s available financial resources and the liquidity of those resources.
Presenting Expenses: To make information about expenses more comparable and useful, all NFPs will be required to provide information about their operating expenses by both nature and function—on the face of the statement of activities, as a separate statement, or in the notes to the financial statements., supplemented with enhanced disclosures about the methods used to allocate costs among functions.
Investment Return: A net presentation of investment expenses against investment return will be required on the face of the statement of activities. External and direct internal investment expenses will be netted against the investment return. Disclosing the components of investment expense will no longer be required.
Statement of Cash Flows: NFPs can continue to present either the direct or indirect method of reporting operating cash flows. However, the presentation or disclosure of the indirect method reconciliation is no longer required if the NFP uses the direct method.
Effective Date and Transition: The amendments 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.
Because virtually every nonprofit organization will be impacted by ASU 2016-14, we recommend that boards (and their finance and/or audit committees) take the time to address these changes prior to the end of the year. New financial resources may need to be allocated to implementing the changes, and the board should be aware of those estimated costs as well. Holding a conference with the external auditor is a good place to begin this process.