Previously in “Changes to Financial Statements for Not-for-Profit Entities, Are You Ready?” we provided information on the changes to net asset presentation and underwater endowments under the new financial statement presentation standard. Now we will address the new presentation and disclosure items related to liquidity and availability disclosures, functional expenses, investment expenses, and the statement of cash flows.

If you missed our first article, the new Accounting Standards Update (ASU) aims to enhance not-for-profit financial statements and disclosures by providing users more detailed information and is effective for years beginning after December 15, 2017 and will be applied retrospectively to your organization’s financial statements.

Liquidity and Availability Disclosures

The ASU requires disclosure of both quantitative and qualitative information about the liquidity and the availability of your organization’s resources. The update requires disclosure of which financial assets will be used to meet cash needs for general expenditures within one year of the balance sheet date and the availability of those assets.  In addition, your organization will need to disclose how it manages its “liquid” available resources and if there are any limitations on those resources.

Functional Expenses

Currently, only voluntary health and welfare organizations are required to provide information about their operating expenses by both nature and function in a statement of functional expenses. Other nonprofit organizations provide this information in a separate supplemental statement or in the notes to financial statements. Under the new standard, all nonprofit organizations will be required to present their expenses by function (program, management and general, and fundraising) and by natural classification, either in a statement of functional expenses, as part of the statement of activities, or in the footnotes to the financial statements.

In addition, for those expenses that are allocated to multiple programs and management and general expense (e.g. salaries and benefits, depreciation, interest, and occupancy related expenses) the allocation methodology used by the organization will be disclosed in the footnotes.

Investment Expenses

 The new ASU requires the netting of investment expenses against investment return,  meaning only the net amount of the investment income is required to be presented in the statement of activities. Both external and direct internal investment expenses are included as “investment expenses.” External investment expenses are those expenses paid by the organization to third parties responsible for the management of the organization’s investment portfolio. Direct internal investment expenses are those expenses related to salaries, benefits, and other expenses of the officer or staff responsible for the organization’s investment portfolio and strategy.

Statement of Cash Flows

There are two methods for the statement of cash flows, the direct method and the indirect method.  The direct method focuses on how cash was received and paid out by the organization for operations. The indirect method focuses on the increases and decreases in the accounts shown on the statement of financial position.  Currently, organizations using the direct method are also required to show an indirect method reconciliation for operating activities (showing the cash provided by or used by the organization agrees under both methods). Under the new standard, organizations presenting direct method statement of cash flows will no longer be required to show the indirect method reconciliation.

With these changes, not-for-profit financial statements will look a bit different than they have in the past. Feel free to contact the TDT nonprofit professionals with questions you may have about the new accounting standard.