New Financial Reporting Standards for NFP: 2018 Reminder
posted Jun 12, 2018 by Meyer Levy, CPA in the Mission Matters Blog
In our recent blog series, New Financial Reporting Standards for Nonprofits we provided specifics about the FASB’s major reporting changes under Accounting Standards Update (ASU) 2016-14. These changes will play a notable role in how your organization prepares its financial statements and how lenders, potential donors, and your board members view the organization’s financial health through its financial statements. With implementation of the new standards literally around the corner, we thought it would make sense to provide a reminder of the ASU’s requirements.
Below is an overview of the changes
- Disclosures about liquidity- There are now two requirements for liquidity disclosures- 1) The nonprofit must disclose how the organization makes sure it has funds to cover operating expenses (qualitative), and 2) The nonprofit must show the amount of financial assets available for general expenditures (quantitative). Of the changes required by the ASU, the disclosures about liquidity are arguably the most relevant change in that this requirement will have the impact on how readers of the organization’s financial statements understand the financial health of the organization. In summary, does the organization have sufficient cash to meet its expenditures over the next twelve months?
- Statement of cash flows- On the statement of cash flows, nonprofit organizations currently have the option to use either the direct method or indirect method to present the cash flow statement. Although the direct method is favored by the FASB, current guidance requires the reporting entity must include the indirect reconciliation when the direct method is used. The new ASU eliminates this requirement.
- New net asset classes- There are now 2 net asset classes, rather than 3, which are as follows:- “with donor restrictions” and “without donor restrictions”. The purpose of this change is to make the financial statements more user friendly and transparent to the reader. The current unrestricted, temporarily restricted and permanently restricted are simply confusing to the reader. In addition, all board designated funds must be disclosed both in connection with their amounts and their purposes. For example, if your NFP has a liquidity reserve fund you would need to include in your financial reports a statement such as, “The nonprofit has $__ of funds designated by the board for emergencies.”
- Investment returns and treatment of investment expenses- The ASU stipulates that external and direct internal investment expenses are netted with investment return in the statement of activities, and eliminates the requirement to disclose these expenses. In addition, the FASB expanded the types of expenses that can be considered investment expenses.
- Classification of expenses- All nonprofits will now have to show expenses by function and by natural classification. In addition, the new guidance requires qualitative disclosures about methods used to allocate costs between program and support functions.
When are these changes effective?
The changes were first introduced in 2016 and are effective for fiscal years beginning after December 15th, 2017.
Questions? Contact any member of our Not-for-Profit Services Team.