In August 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2016-14 (ASU 2016-14) to make improvements to the communication of information on nonprofit financial statements. ASU 2016-14 went into effect this year and impacts all nonprofit (Topic 958) and healthcare entities (Topic 954).
When the auditors come around at the end of the year, organizations that haven’t successfully implemented the new accounting standards may be faced with overwhelming audit adjustments and costly penalties. One of the worst things that could happen as a result of noncompliance is a loss in contributions and grant funding.
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If you haven’t already addressed these changes, you’ll want to become familiar with the accounting updates and implement the changes immediately. Don’t wait until the end of the fiscal year to start thinking about how to revamp your policies and procedures to comply with the FASB update.
How ASU 2016-14 Will Affect Nonprofits in 2018
The main provisions of the update address issues related to the complexity of net asset classification, transparency regarding the liquidity of funds, deficiencies in reporting financial performance measures, inconsistencies in expense reporting, and misunderstandings in presenting cash flow information.
1. Net Asset Classifications
Prior to this update, there were three net asset classes: unrestricted, temporarily restricted, and permanently restricted. There are now two classes: net assets without donor restrictions and net assets with donor restrictions. The latter includes what was formerly separated into the temporarily restricted and permanently restricted net asset categories.
In addition, organizations are now required to disclose additional information regarding net assets with donor restrictions, including liquidity and availability of funds as well as when and how funds can be used. Year-end balances and purposes of board designated funds must also be disclosed along with policies for managing those funds.
2. Underwater Endowments
For endowments with losses (i.e. underwater endowments), organizations are now required to report the current fair value of the fund, original gift amount, and amount of the deficiency. Donor funded endowments must be reported as net assets with donor restrictions on the statement of financial position. Quasi-endowment funds, which are designated by the organization’s governing board, should be reported as net assets without donor restrictions.
3. Donations of Property and Equipment
The new guidelines require that donor restrictions should be released when assets are placed in service rather than releasing donor restrictions over estimated useful life (unless otherwise stipulated by the donor).
4. Transparency and Utility of Liquidity
New disclosures will be required that describe the liquidity and availability of funds. Specifically, how organizations will meet cash requirements for the next year. This is a detailed disclosure that will encompass the nature of the assets, donor limits, laws, contracts, and board limits.
5. Expenses Classified by Function and Nature
Functional expenses grouped by program or support must now be reported by their natural expense category (e.g. payroll, rent, etc.). This information must be presented on the face of the statement of activities, in a disclosure, or in a separate financial statement. Also, organizations are now required to disclose the method used to allocate costs between programs and support functions.
6. Statement of Cash Flows
This ASU eliminates the requirement to show the indirect reconciliation from the change in net assets when the direct method of reporting is used.
Adoption of these new rules will result in significant changes to financial reporting and disclosures for nonprofits. With the final deadline upon us this year, make sure that you understand the new requirements and can implement the appropriate changes to your reporting. Having an accounting system built for compliance with nonprofit accounting standards will allow you to generate the necessary accounting information to meet your managerial, financial, and compliance reporting needs.
Want to learn more about what ASU 2016-14 might mean for your organization? Watch our webinar: What Nonprofit CFOs Need to Know about the New FASB Regulations.