Not-for-Profit Financial Statements Are Changing – Are You Ready?

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Forget everything you thought you knew about not-for-profit (NFP) financial statements. Ok, well not everything. FASB just issued ASU 2016-14 in an effort to improve the current net asset classification requirements and the information presented in financial statements and notes about a NFP’s liquidity and financial performance.

So what are the big changes?

First, the distinction between permanent and temporary restrictions has been eliminated from the face of the financial statements. This change will simplify the statements of financial position and activities by showing amounts with or without donor restrictions. Expanded disclosure requirements will provide notes to financial statements that give details on the nature, amounts and effects of donor restrictions.

All NFPs are now required to present expenses by natural category and by function and that information must be presented in one location. You will have the choice of where to present that information, whether it be presented in the statement of activities, a separate statement of functional expenses, or in the notes to the financial statements. NFPs are also required to disclose the method(s) used to allocate costs among functional categories.

If you were a little panicked about the idea of having to switch to the direct method of cash flows, take a deep breath. You may continue to choose between the indirect or the direct method. However, those who choose the direct method are no longer required to have the indirect method reconciliation for cash flows provided by operating activities.

In addition to the disclosures mentioned above, there are other changes coming to footnotes that will make them a little longer. The most significant note changes are the requirements to present information about how the NFP manages it resources available to meet cash needs within the next year and the NFP financial assets available to meet general cash needs within the next year. For example, a NFP may disclose how it invests cash in excess of daily requirements or in the event of short-term cash needs, the NFP may draw upon its line of credit. Also, the NFP would provide a reconciliation of financial assets less those subject to donor restrictions and board designations to arrive at financial assets available to meet cash needs within one year. Other enhanced disclosures will include:

  • Amounts and purposes of board or other self-imposed designations on net assets.
  • Details on the composition of net assets with donor restrictions at year-end and details on the types of restrictions met during the year.
  • For endowment funds, NFPs will need to disclose the fair value of the underwater endowment funds, the original gift amount required to be maintained by the donor or by law, and the amount of the deficiencies of the underwater funds.

The new requirements will be effective for fiscal years beginning after December 15, 2017. Early adoption is permitted. If you present comparative financial statements in the year of adoption, you’ll need to apply the changes to both years presented. For some, that means you’ll be implementing these changes as early as December 31, 2017.

FASB is offering a webcast on Tuesday September 13, 2016 t provide an overview of the standard http://www.fasb.org/cs/ContentServer?c=Page&pagename=FASB%2FPage%2FSectionPage&cid=1176168373693. In addition, the AICPA Not-for-Profit Section is offering a similar webcast on September 28, 2016 http://www.aicpa.org/InterestAreas/NotForProfit/CPEAndEvents/Pages/2016-webcast-calendar-NFP-Section.aspx.

For an in-depth look at how the new standards impact your financial statements and the steps you’ll need to take to implement the standards, please contact me at 317-241-2999 or ameko@greenwaltcpas.com.