Accounting Standards Update 2016-14
Not-for-Profit Entities (Topic 958)
Presentation of Financial Statements of Not-for-Profit Entities

The Financial Accounting Standards Board (“FASB”) issued an accounting standards update in August 2016 to improve the information provided in not-for-profit financial statements and notes to the financial statements.  The amendments in this update make certain improvements that address many, but not all of the identified issues about the current financial reporting of not-for-profits.  A second phase of the project is expected to address more protracted issues surrounding operations (definition and measurements).  The FASB has not yet released a date for the second phase of the update.

The project update targets the following five key areas:

  • The reporting of net assets by not-for-profits;
  • The liquidity information provided by not-for-profits;
  • The statement of cash flows that some not-for-profits prepare (i.e., those that use the direct method);
  • The operating measure information provided by some not-for-profits; and
  • The reporting of expenses by not-for-profits.

The update makes several improvements to current reporting requirements that address, among others, the following:

  • Complexities about the use of currently required three classes of net assets that focus on the absence or presence of donor-imposed restrictions and whether those restrictions are temporary or permanent;
  • Deficiencies in the transparency and utility of information useful in assessing an entity’s liquidity caused by potential misunderstandings and confusion about the term unrestricted net assets. In addition, how restrictions or limits imposed by donors, grantors, laws, contracts, and governing boards affect an entity’s liquidity, classes of net assets, and financial performance. This allows not-for-profits to provide additional information that would be useful in assessing:
    • How a not-for-profit manages its liquid resources available to meet cash needs for general expenditures, and
    • The availability of a not-for-profits financial assets at the balance sheet date to meet cash needs for general expenditures;
  • Inconsistencies in the type of information provided about expenses of the period.  For example, some, but not all not-for-profits provide information about expenses by both nature and function; and
  • Impediment of preparing the indirect method reconciliation if a not-for-profit chooses to use the direct method of presenting operating cash flows.

The amendments in this update are effective for annual financial statements issued after December 15, 2017.  Early adoption is permitted.  If early adoption is elected, all provisions must be applied.

We can help your management team with these reporting changes.

About the Authors

Keith J. Libman
CPA
Partner, Assurance and Advisory

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