By Joe Ryan, ISCPA Nonprofit Organizations Committee
Issue No. 2016-10 published by the ISCPA
In August, the Financial Accounting Standards Board (FASB) issued a new accounting standard for nonprofit organizations, improving the presentation of the net asset classification, liquidity and cash flows. The standard will be effective for fiscal years beginning after Dec. 15, 2017 (calendar 2018 for calendar year end organizations) and early adoption is allowed.
Upcoming changes include:
- Reduction of the number of classes to two: net assets with donor restrictions and net assets without donor restrictions. These would also be used on the statement of activities.
- Requiring enhanced disclosures of the governing board designations and appropriations, and the composition of net assets with donor restrictions at the end of each period. Unrestricted net assets has meant, by some, to be the same as reserves. These assets can also include equity in property and equipment, which of course is not spendable. Both are now required. • Adding qualitative information on how the nonprofit manages its liquid assets available to meet cash needs for general expenditures within one year of the statement of financial position date. This could include defining the liquid assets, and the policy for determining an adequate amount of financial resources to meet general expenditures, liabilities and other obligations. The disclosure should include quantitative information on the availability of financial assets to meet cash needs.
- Reporting expenses by both natural and functional classifications on the face of the statement of activities, as a separate statement, or in the notes to the financial statements. Also, the policy used to allocate costs among program and support functions will need to be disclosed.
Endowment Fund Disclosures
One of the more complex and confusing components of nonprofit financial statements is the disclosure related to an endowment fund. The new guidance includes:
- the nonprofit organization’s policy concerning appropriation from underwater endowment funds
- the aggregate value of the endowment funds
- the aggregate of the original gift amount to be maintained
- the aggregate amount by which funds are underwater, which are to be classified as part of the net assets with donor restrictions.
These enhancements should reduce the complexity related to disclosure and reduce costs to preparers. The FASB has identified the new guidance as the first of two phases intended to improve the financial reporting of nonprofit organizations. The second phase will address issues surrounding defining the term operations. There is no guidance as to when the second phase will be complete.
What You Should Be Doing Now:
There are several enhancements and cost savings to preparers of nonprofit financial statements that are built into the implementation of the new guidance. Here’s what should be considered:
- Review and study the update to topic 958 of the accounting standards codification. Identify the changes that affect your organization. (Find update No. 2016-14 at www.fasb.org.)
- Inform clients of effects the new standard will have on their financial statements, how the organization needs to prepare for the changes and consider early implementation advantages.
- Adopt a policy that determines adequate financial resources needed to meet one year of general expenditures, liabilities, and other obligations.