For the first time in over 20 years, there will be changes to the way not-for-profit organizations are required to present their financial statements.
The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-14, Not-for-Profit Entities (Topic 958), Presentation of Financial Statements of Not-for-Profit Entities on August 18, 2016. This update enables not-for-profits to better tell their financial story, to make the financial statements more useful to readers, and to provide more consistency in reporting between organizations.
The new ASU requires these changes in the following categories.
Net Asset Classification
Expense Reporting
Reporting of Investment Returns
Liquidity Information
Statement of Cash Flows
Organizations may still choose between the direct method and the indirect method; however, disclosure of the indirect method reconciliation is no longer required when using the direct method.
The ASU is effective for fiscal years beginning after December 15, 2017, and for interim periods within fiscal years beginning after December 15, 2018. Early adoption is permitted.
The amendments should be applied retrospectively to all periods presented. If the not-for-profit presents comparative financial statements, it has the option to omit the following information for any periods presented before the year it adopts the ASU:
In the year of adoption, not-for-profits should disclose the nature of any reclassifications or restatements and any effects on the changes in their net asset classes for each year that’s presented.
The previous reporting requirements for not-for-profit organizations fell under FASB Statement No. 116 and Statement No. 117, which the FASB issued in 1993.
In November 2011, the FASB announced two projects on their agenda that were intended to improve the financial reporting of not-for-profit entities. The objectives of these projects were based on suggestions received by the board from the Not-for-Profit Advisory Committee, known as the NAC. The projects included one standard-setting project and one research project. The objective of the research project was to study communications other than financial statements that not-for-profit entities use to tell their financial story. In 2014, the FASB voted to remove the research project from its agenda.
The standard-setting project moved forward and in April 2015, an exposure draft was released with the comment period ending in August 2015. In October 2015, the board decided to split the proposed update into two phases:
The FASB views ASU 2016-14 as phase 1—the beginning of guidance to result from its multiyear review of the not-for-profit financial reporting model. In the review, the FASB identified additional, more radical changes as well as controversial proposals that they decided to put off until phase 2. Such proposals include whether and how to define the term operations and align measures of operations (or financial performance) as presented in a statement of activities with measures of operations in a statement of cash flows.
We’ll continue to provide insight on the new requirements with implementation suggestions, and will be following any further developments from the FASB on phase 2. In the meantime, contact your Moss Adams professional for questions on how these changes will impact your organization.