What New Accounting Standards Mean to Nonprofit Financial Statements

When it comes to managing finances, nonprofit accounting presents unique challenges that can’t be addressed with outdated spreadsheets and manual processes.

On August 18, 2016, FASB released the highly anticipated Accounting Standards Update (ASU 2016-14) Presentation of Financial Statements of Not-for-Profit Entities.  These changes will impact all nonprofits and are geared towards improving nonprofit financial statements and to provide more useful information to stakeholders. 

FASB ASU 2016-14 is the first of a two-phase project, intended to strengthen clarity, transparency, and consistency in nonprofit financial reporting.  The effective date for phase 1 is annual financial statements issued for fiscal years beginning after December 15, 2017, and for interim periods within fiscal years beginning after December 15, 2018. Nonprofit organizations currently utilize three classes of net assets: unrestricted, temporarily restricted, and permanently restricted. These will now become two classes:

  • Net assets with donor restrictions

  • Net assets without donor restrictions

Footnote disclosures will be required to include the timing and nature of the restrictions, as well as the composition of net assets with donor restrictions at the end of the period. Part of the associated changes to net asset classifications will include a change to how underwater endowments are handled. Under the new guidelines, these assets will now be classified as net assets with donor restriction. Board-designated net assets will now require disclosure of amounts and purposes.

Additional disclosures related to these assets will also be required.

  • Nonprofits currently can recognize the expiration of a donor restriction over time, but under new guidelines, they will need to reclassify net assets with donor restrictions that are used to acquire or construct long-lived assets as ‘net assets without donor restrictions’ when the asset is placed in service.

  • Currently nonprofit organizations are required to provide an indirect reconciliation when using the direct method of presenting operating cash flows. With the new guidelines, nonprofit organizations will be able to select the presentation method that best serves the entity, and no reconciliation will be required.

  • With the new FASB guidelines, nonprofits will need to present the amount of change in each of the two new classes of net assets and the total net assets. They will need to present two subtotals of operating activities that each correspond with changes in net assets without donor restrictions.

  • All nonprofit orgs will now have to provide information about their operating expenses by both nature and function and include enhanced disclosures about their methods of allocating costs among the different functions.

The new ASC 606 and IFRS 15 accounting standards—some of the most far-reaching changes to accounting —are changing nonprofit financial management!

This content was originally posted here.

[ Published: September 6, 2017 ]