4 Key Facts about the New FASB Not-for-Profit Standard
The Financial Accounting Standards Board recently released Accounting Standards Update (ASU) 2016-14 Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities. ASU 2016-14 is the result of a multi-year FASB project conducted to review the financial reporting model for not-for-profits that has been in place for approximately 20 years. As a result of the review, the FASB identified several areas of the financial reporting model that needed improvements or updates to provide better information to those that rely on the financial statements issued by not-for-profits.
The full standard spans 270 pages (view it here) but it is not as daunting as it may seem. Here are four key facts about the new standard to keep in mind:
- It’s an update, not an overhaul. The FASB has indicated that it does not intend ASU 2016-14 to be a complete overhaul of the current financial reporting model for not-for-profits contained in GAAP. The current financial reporting model in GAAP is fundamentally sound. The goal of ASU 2016-14 is to improve how not-for-profits communicate their financial performance and condition, while also reducing certain costs and complexities in preparing financial statements.
- It will enhance reporting of expenses. All not-for-profits will now be required to disclose an analysis of expenses by both functional and natural classifications. Up until now, only certain types of not-for-profits (voluntary health and welfare entities) were required to present such an analysis. Going forward, all not-for-profits will be required to disclose this information. Additionally, not-for-profits will now disclose the methods used to allocate expenses to the functional categories.
- Reduction in net asset classifications puts more focus on disaggregation and disclosure. One of the key changes will be to reduce the net asset classifications from the current three to two. Unrestricted net assets will now be labeled “net assets without donor restrictions” and temporarily and permanently restricted net assets will be combined into one class labeled “net assets with donor restrictions.” With a reduced number of net asset classes, not-for-profits will focus on disaggregating and disclosing the components of their net asset classes based on external donor restrictions and internal board designations. The FASB is retaining the requirement to disclose the nature and amounts of donor restrictions on net assets with donor restrictions. Additionally, the FASB is adding a new requirement to disclose board designations on net assets without donor restrictions; this disclosure was previously optional but will now be mandatory.
- It requires new disclosures on liquidity. One of the chief concerns the FASB heard in its research for this project was the difficulty users have in understanding the liquidity of some not-for-profits. To address this concern, the FASB will require all not-for-profits to add disclosures regarding how they manage liquidity and information that communicates the availability of financial assets to meet cash needs for general expenditures. This new requirement may be the most challenging aspect for preparers of financial statements because it goes beyond the usual financial data included in the statements and footnotes and is focused on financial management issues.
ASU 2016-14 is effective for annual financial statements issued for fiscal years beginning after December 15, 2017, and for interim periods within fiscal years beginning after December 15, 2018. Early application is permitted. The new standard includes guidance for the year of transition when the new standard is adopted, including specific disclosures that should be made. Auditors will also want to consider the need to include an emphasis-of-matter paragraph in their auditor’s report to discuss the effects of adoption of the new standard.
Given the significant reporting and disclosure changes involved, all preparers and auditors involved with not-for-profits should start preparing for these changes now. I encourage my clients to create an implementation plan. Now is the time to learn about this new standard so you can begin the process of getting your not-for-profit ready for implementation. Some of the new disclosures, like those regarding liquidity and availability, may necessitate an education process for managers, board members, lenders and others who rely on the financial statements for decision-making. Other disclosures, such as the required disclosure of board designations on net assets, may require not-for-profits to adopt new policies and practices.
Want to learn more? The AICPA Not-for-Profit Section has a number of resources and learning opportunities to help you prepare for the new standard. AICPA Not-for-Profit Section members can access a webcast entitled "Applying FASB's New Not-for-Profit Financial Statement Standard" by visiting the webcast archive.
Andrew Prather, CPA, CGMA, Shareholder - Audit & Assurance, Clark Nuber P.S. Andrew is a leader of his firm’s Not-for-Profit Services Group. He recently joined the FASB’s Not-for-Profit Advisory Committee and was a member of the AICPA’s Not-for-Profit Expert Panel.
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