A federal adjustment in accounting standards last year is creating the largest change to not-for-profit financial reporting in nearly two decades.
On Aug. 18, 2016, the Financial Accounting Standards Board released an update titled, “Not-for-Profit Entitles (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities.” It represents the first phase of the financial statement presentation reform project.
This widely anticipated final standard includes requirements aimed to increase consistency in practice and comparability among not-for-profits, as well as transparency regarding availability and flexibility of each entity’s financial resources. The effective date is for fiscal years beginning after Dec. 15.
Here are the key changes:
• The balance sheet will need to distinguish between two new classes of net assets: those with donor-imposed restrictions and those without, rather than the previously required three restricted classifications. The update retains the current requirements to provide information on the nature and amount of different types of donor restrictions in the notes to the financial statements. In addition, underwater donor-restricted endowment funds are to be shown within the donor-restricted net asset class rather than unrestricted as previously required.
• Another change is the requirement to report expenses by both natural classification and their functional classification either on the face of the income statement, as a separate statement or within the financial notes. This additional information should benefit the users by providing more information about how not-for-profits use its resources.
• The income statement also will need to present investment revenues net of both external and direct internal investment expenses. The requirement to disclose the amount of investment expenses in the notes to the financial statements has been removed.
• The income statement is hit with one more change to address expirations of restrictions on gifts of cash or other assets that will be used for acquiring or constructing long-lived assets. In the absence of explicit donor stipulations, these transactions must use the placed-in-service approach as well as the option to imply a time.
• After much deliberation regarding the statement of cash flows, FASB will allow a not-for-profit to continue to use either the direct or indirect method of reporting. If the entity chooses the direct method, there no longer is a requirement to present or disclose an indirect reconciliation.
• One last key change is to include information about the availability and liquidity of the not-for-profit’s financial resources. A not-for-profit will be required to include qualitative disclosures about how their entity manages its liquid and available resources. It also must include quantitative information about the availability of financial assets. In addition, there are requirements to include enhanced disclosures on amounts and purposes of governing board or self-imposed designations and appropriations by the end of the reporting period.
The second phase of the financial statement reform project remains in a deliberation and FASB has not posted an estimated completion date.
Not-for-profits should make efforts now to gain an understanding of the standard and how it will affect their reporting.
Kristen Bright is a director with BKD LLP in Springfield. She may be reached at kbright@bkd.com.
