The Financial Accounting Standards Board’s (FASB) Nonprofit Advisory Committee has been working on a project for about four years that would improve NFP financial statements so they are easier to read and understand, as well as provide more useful information to grantors, donors, creditors and other stakeholders.  On August 18, 2016, ASU 2016-14, Not-for-Profit Entities (Topic 958), Presentation of Financial Statements of Not-for-Profit Entities was issued by the FASB.  This is the first major change for NFP reporting since 1993 and is effective for fiscal years beginning any time in 2018.

The new guidance addresses certain issues in the following main areas:

• Net Asset Classes – The three current classes will be streamlined so that Temporarily Restricted and Permanently Restricted will be combined into a single “Net Assets with Donor Restrictions” classification, while Unrestricted net assets will become “Net Assets without Donor Restrictions.”  The financial statement footnotes will disclose the nature of the donor restrictions, emphasizing how and when the resources can be used.  The guidance for classifying and disclosing deficiencies in endowment funds (“underwater endowments”) will also be simplified.

• Liquidity and Availability of Resources – new disclosures will address liquid resources that may appear to be available for meeting near-term financial requirements, but whose use is actually restricted.

• Expense and Investment Return – disclosures will now include expenses by natural and functional classification, as well as the cost allocation methods, and an analysis showing how the nature of their expenses relates to their program and supporting activities. Investment return will continue to be presented net of investment expenses, but those netted expenses will be limited to “external investment expenses and direct internal investment expenses.”  Disclosure of the netted expense amount will no longer be required.

• Operating Cash Flows – this can still be presented with either the direct or indirect method.

There is still much to learn regarding the implementation of this new standard and NFPS must gain a proper understanding of the critical changes that will affect their NFP’s financial statements.  On September 13, 2016 at 1:00pm, the FASB will be providing a free live webcast to anyone wishing to participate, with an overview of this Accounting Standards Update (ASU).  Register for the free webcast here.

As always, Dermody, Burke & Brown will help to provide the necessary resources to implement this standard.