Nonprofits recently underwent comprehensive changes to financial reporting with FASB’s Accounting Standards Update 2016-14. The amendment will have a larger impact on smaller organizations and its effects will depend on the complexity of a nonprofits specific financial statements. Overall the changes are intended to make immediate improvements that will:
- Enhance the current model
- Improve net asset classification
- Improve information in financial statements including:
- Financial performance
- Cash flows and liquidity disclosures
- Better enable organizations to tell their story
The goal is to simplify reporting for nonprofits while making it easier for users to understand the nonprofit’s financial position. The new standard goes into effect for annual financial statements issued for fiscal years beginning after December 15th, 2017 and for interim periods within fiscal years beginning after December 15th, 2018.
Here are some of the big changes your nonprofit needs to be aware of:
- Net asset classifications. Under previous standards nonprofits had three net asset classifications: unrestricted, temporarily restricted, and permanently restricted. Under the amendment temporarily and permanently restricted have been combined into a new class called with donor restrictions and unrestricted is now without donor restrictions. Nonprofits have a new disclosure requirement that include amount, purpose, and type of board designations and may choose to disaggregate further with donor restrictions.
- Underwater endowment funds. Endowments that have a current fair value that is less than the original gift amount is classified as “underwater”, and needs to be classified in net assets with donor restrictions and you must now disclose the following: policies for spending when underwater; aggregate fair value; original amount or level to be maintained for the endowment; aggregate amount of deficiencies to be maintained.
- Direct or indirect statement of cash flows. Nonprofits have the option to use direct or indirect method for the statement of cash flows and if an organization uses the direct method they are no longer required to show indirect reconciliation. The indirect method works well for smaller less complex nonprofits while the direct method is more intuitive and generally more understandable.
- Board designated net assets. It’s not uncommon for a nonprofit’s governing body to make designations or appropriations. Board-designated assets will fall within donor restrictions that are subject to self-imposed limits that require enhanced disclosure information that require the purposes of these designations. The option to imply a time restriction and release the restriction over an asset’s useful life will no longer be permitted.
Many nonprofits have yet to implement these changes to their financial statements causing complications and increased costs during the annual financial audit. At EAB Solutions, we ensure that our clients are notified of changes and educated on the implications for their organization. For a free ASU 2016-14 compliance review of your financials, contact us today.