FASB Issues Changes to the Not-for-Profit Accounting Rules
On August 18, 2016, the Financial Accounting Standard Board ("FASB") issued Accounting Standards Update (ASU) 2016-14, Presentation of Financial Statements of Not-for-Profit Entities. Not-for-profit entities (NFPs) have been preparing their financial statements under current guidance that dates back to 1993. Changes in the overall business environment along with demands for increased transparency caused the FASB Not-for-Profit Advisory Committee (NAC) in 2011 to recommended an evaluation of the current reporting model and exploration of ways to improve it. The overall project was divided into two phases and the issuance of ASU 2016-14 marks the completion of Phase I of the project.
The most significant change ASU 2016-14 brings about is the classification of net assets. Currently, NFPs account for net assets under three categories: Unrestricted, Temporarily Restricted and Permanently Restricted. The new guidance reduces this to two categories: Net Assets With Donor Restrictions and Net Assets Without Donor Restrictions. It was concluded that over time the distinctions between the two restricted categories brought more confusion and variance in practice and no additional value to the financial statement users.
ASU 2016-14 also included the following requirements:
- Cash Flow Statement – Although the original intent in early proposals was to require the direct method of cash flows, the new guidance continues to allow for either the indirect or direct method. It also eliminates the requirement to include a reconciliation to the indirect method when the direct method is chosen.
- Reporting of Expenses by Function and Nature – The guidance requires NFPs to report expenses both by function and by nature either in the notes or in a separate statement and include disclosure of the methods used to allocate expenses among program and supporting functions.
- Reporting of Investment Return – NFPs will now report their investment return net of any external or internal investment expenses and no longer need to disclose those expenses.
- Other Increased Footnote Disclosures – The new guidance requires enhanced disclosures regarding governing board and donor restrictions, quantitative and qualitative disclosures on liquidity, increased disclosures surrounding underwater endowment funds, and others.
- Use of the Placed-in-Service Approach to Donor Restrictions – Absent donor restrictions, the expiration of restrictions of cash or other assets used to acquire or construct long-lived assets will be accounting for under the "placed-in-service" approach and eliminates the current option to release donor-imposed restrictions over the life of the asset.
ASU 2016-14 is effective for financial statements with fiscal years beginning after December 15, 2017. Early adoption is permitted.
Phase II of the NFP reporting model project is still underway and includes some of the more controversial changes to the NFP reporting model including consideration of a performance measure requirement, presentation of segment information and realigning the cash flow statement.