Nonprofit Insights: Changes on the Horizon – The New Nonprofit Reporting Standards

The Financial Accounting Standards Board (FASB) Accounting Standards Update 2016-14 (“ASU”) marks one of the most impactful financial reporting standard changes to nonprofit accounting guidelines in more than 20 years. Through these changes, the FASB expects to bring increased visibility into nonprofit financial statements, what goes in the statements, and how the statements are presented.

To help clarify these changes, our Nonprofit Group hosted a seminar on November 17 to dig a little deeper into this update. Armed with a team of assurance and advisory specialists, tax strategists, nonprofit financial experts, and business advisors with first-hand nonprofit board experience, we presented to a sophisticated group of nonprofit executives and finance personnel on the new nonprofit reporting standards as outlined in ASU 2016-14. Below are some of the highlights from the session.

This ASU aims to improve the current net asset classification requirements and information in financial statements including reports on performance, liquidity, and cash flow. The FASB hopes to address the current problems in reporting requirements with some needed improvements.

Goals of the New Standard

The goals for the ASU, as outlined by FASB, are as follows:

1. Update, not overhaul the current presentation;
2. Provide more useful information to the financial statement users;
3. Improve the net asset classification;
4. Improve information in the financial statement related to:
   • Liquidity
   • Financial Performance
   • Expenses
   • Cash Flow

The FASB hopes to reduce complexity and costs while providing much-needed information about management’s execution of stewardship and programmable responsibility, and ultimately, the organization’s ability to provide continuing services. There is also going to be a Phase II, much of which will focus on outlining program outcomes in the financial statement disclosures.

Highlights of the New Standard

The ASU addresses these problems with reporting requirements:

Net asset classifications. Collapses the new asset classification from three (unrestricted, temporarily restricted, and permanently restricted) to two (net assets without donor restrictions, and net assets with donor restrictions).

Liquidity Standards. Will require both qualitive and quantitative disclosures both on the financial statements and on the footnote about an organization’s liquidity and its ability to meets its operating expenses over the next year.

Expenses. All nonprofits will now need to report expenses both by function and nature either on the face of the financial statements, as a separate statement, or in the footnotes (originally just voluntary health and welfare organizations need to report). Disclosures must include methods to allocate costs between different areas of your program and supporting activities.

Investments. Net investment return, will net income and expenses but no longer require expenses to be separately stated in the financial statements or footnotes. Nonprofits will need to ensure they present the amount of change for each net asset class for investments and present net of all investment expenses, both internal and external.

Cash Flows. Option to use a direct or indirect method. This allows you to change the method to one that is more understandable for your organization. Direct method no longer requires reconciliation over to indirect.

Effective Dates

The new standards will be effective for calendar 2018 year-end and fiscal year-ends after that. Of course, you can always be an early adopter, but in the first year of adopting changes, you will need to apply retro but can omit disclosures about liquidity and available resources.

There are also new reporting requirements and disclosures related to “underwater” endowments to be presented in the financial statements. The standard now requires the loss of the value of the endowment in the fund where the endowment is accounted for, rather than loss of value being accounted for in the unrestricted fund Stay tuned for more updates on Phase II.

This ASU significantly impacts nonprofits, potentially costing substantial consequences if not adopted quickly. No two organizations are alike, so accurately allocating dollars is critical to staying on track with your mission.