6 Key Changes for Nonprofits in the FASB’s ASU 2016-14

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.

ABOUT THE AUTHOR

Louis Stratton

Louis Stratton is a Senior Financial Solutions Account Executive at Blackbaud. He has more than 24 years of experience working with organizations to help them achieve their purpose by increasing cash flow, fundraising, reducing pressure and worry, and improving systems and processes. Louis works with organizations to improve their processes, technology, and develop top performing finance teams. Prior to Blackbaud, Louis held leadership positions at Meador Stratton LLP and Porte Brown, participated in the Indiana CPA Society Board of Directors and Leadership Cabinet, and served as an Adjunct Professor in the Graduate School at Olivet Nazarene University.