Changes to NFP Reporting Standard Pt. 1

Jill S. G. Palmeter, CPA, Principal (Apr, 2018)

As we mentioned before, 2018 will be a busy year for not-for-profit (NFP) organizations.  The most important and time-consuming pronouncement issued by the Financial Accounting Standards Board (FASB) affecting organizations beginning with December 31, 2018 year-ends is ASU 2016-14, “Presentation of Financial Statements of Not-for-Profit Entities.”  The FASB believes this new standard will make financial statement reporting more comparable, easier to understand, and more useful as there will be information on liquidity, financial performance, nature of expenses, and more. It is the first major change for NFP reporting since 1993, and includes more required explanatory disclosure on both the face of the financial statements and the footnotes so readers can gain a better understanding of a NFP’s activities and financial situation. Many of the reporting items in your financial statements will be changing and it is important to understand the changes so that your organization can make the necessary changes to be audit-ready when the time comes.  

The most significant changes of this reporting standard can be summarized in the following areas:

  • Net asset classification, including the new treatment for underwater endowment funds
  • Liquidity and availability of resources
  • Expense reporting
  • Operating measures
  • Statement of cash flows
  • Investment return

If we begin by examining the Net Asset Classification area, you will note that for 25 years this area was presented using Unrestricted (including Board Designated), Temporarily Restricted (by donor; by time or purpose), and Permanently Restricted (by donor with no invasion of historical corpus) net asset categories.  The categorization of financial activity was determined by a donor’s or a Board of Director’s intent, or the lack of any specific direction when activity was unrestricted. 

The above three categorized areas will now be reduced to two:

  • Without Donor Restrictions – replaces unrestricted and will continue to include Board Designated net assets as these funds have not been restricted by donors.  Board Designated net assets may be earmarked for future programs, a quasi-endowment, investment, contingencies, purchase or construction of fixed assets, or other use.  These net assets will be required to be separately presented with both the nature and amounts of the board designations either on the face of the statement of financial position or in the footnotes.
  • With Donor Restrictions – combines temporarily restricted and permanently restricted into one category.  There will be disclosure emphasizing the nature of the donor restrictions: e.g. – Perpetual in Nature, Purpose Restricted, and Time Restricted.

Additional information regarding net asset classification will be discussed in the next thought leadership article.  We encourage you to save or print these articles for future reference to help your NFP with this important reporting transition.

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The information reflected in this article was current at the time of publication. This information will not be modified or updated for any subsequent tax law changes, if any.