Key Changes Not-for-Profits Should Expect from FASB’s Reporting Standard Update

By Weston Porter, CPANot-for-Profits (NFPs) should be aware of the new accounting standard issued by the Financial Accounting Standards Board (FASB) that is effective for fiscal years starting after December 15, 2017. We have summarized an overview of the new accounting standard update and how it will shape nonprofit financial statements.What’s the purpose of the update?The FASB hopes to make improvements to the communication of information within financial statements. The main provisions of the update are to address complexities related to the currently required three major classes of net assets (unrestricted, temporarily restricted, and permanently restricted), address the lack of transparency of information used in assessing an entity’s liquidity of funds, and to address inconsistencies in the information provided about expenses of the period (some NFPs provide information about expenses by both nature and function while others do not). Additionally, the update addresses issues related to the difficulty preparing the indirect method reconciliation if a NFP chooses to use the direct method of presenting operating cash flows.What’s changing?The following are the main changes being made with this update that will impact the contents of financial statements.

Net Assets

There will now only be two classes of net assets presented on the face of the statement of financial position as opposed to the three classes previously presented. These two classes will be net assets with donor restrictions and net assets without donor restrictions.

Expenses

NFPs are now required to report expenses by both natural and functional classification.

Reconciliation

Continue presenting, on the face of the statement of cash flows, the net amount for operating cash flows under either the direct or indirect method, but no longer requires the disclosure of the indirect method (reconciliation) if using the direct method.

Enhanced Disclosures

NFP financial statements will have to provide the following enhanced disclosures:1. The amount and purpose of any donor-imposed restrictions that result in self-imposed limits on resources without donor-imposed restrictions.2. Composition of net assets, with donor imposed restrictions, at the end of the period and how the restrictions affect the use of resources.3. Qualitative information that communicates how a NFP manages its liquid resources available to meet cash needs for general expenditures within one year of the balance sheet date.4. Quantitative information that communicates the availability of a NPF’s financial assets, at the balance sheet date, to meet cash needs for general expenditures within one year of the balance sheet date.5. Method(s) used to allocate costs among various programs and support functions.6. Certain information concerning underwater endowments.

Investment Expenses

Report investment return net of external and direct internal investment expenses and no longer require disclosure of those netted expenses.

Placed-in-Service Approach

NFPs should use in the absence of explicit donor stipulations, the placed-in-service approach for reporting expirations of restrictions on gifts of cash or other assets to be used to acquire or construct a long-lived asset. This will eliminate the option to release the donor-imposed restriction over the estimated useful life of the acquired asset.If you have questions about how these changes will pertain to you, please contact one of our nonprofit experts.