Be Prepared for FASB’s New Standard for Exempt Organizations

September 14, 2016

road-sign-663368_1280In August 2016 the Financial Accounting Standards Board (FASB) announced the long anticipated Accounting Standards Update (ASU) “2016-14—Not-For-Profit Entities (Topic 958): Presentation of Financial Statements of Not-For-Profit Entities”.   These new guidelines, the first changes to be made to financial reporting in over 20 years, will have a big impact on exempt organizations and their financial reporting. The updated standard is effective for fiscal years beginning after December 15, 2017, and has been released now to give organizations time to prepare.

This new ASU will impact all exempt organizations, and is the result of a determination by the FASB that financial statements of exempt organizations could be improved to provide more useful information to donors, grantors, creditors, and others.  The amendments in ASU 2016-14 are the first of a two-phase project intended to make short-term improvements that address many of the issues identified by the FASB, including:

  • Complexities in the use of the required three classes of net assets
  • Deficiencies in transparency and utility of information in assessing an organization’s liquidity
  • Inconsistencies of reporting expenses by function and nature
  • Presentation of cash flow information

Net Asset Classification Requirements

There are currently three classes of net assets—unrestricted, temporarily restricted, and permanently restricted—that will be combined into two. Unrestricted net assets will become “net assets without donor restrictions,” while temporarily and permanently restricted net assets will collectively become “net assets with donor restrictions.” The notes to the financial statement will include expanded information so the user will be able to understand the timing and nature of the restrictions and the composition of net assets with donor restrictions at the end of the period.

The update will also require the enhanced disclosures about the amounts and purposes of governing board designations, appropriations, and similar actions that result in self-imposed limits on the use of resources without donor-imposed restrictions as of the end of the period.

Underwater endowments will now be classified in net assets with donor restrictions instead of the current classification in unrestricted net assets. Expanded notes will also be required to disclose amounts underwater and to present plans for reducing or not spending from these funds.

Investment income will now be reported after deducting external and direct internal investment expenses. The disclosure of investment expenses is permitted but will no longer be required.

Transparency and Utility of Information in Assessing Liquidity

New disclosures will need to be made regarding the management of liquidity and the financial assets available to meet near-term demands for cash. The disclosure will include both quantitative and qualitative information, including factors that may impact the financial availability such as the nature, imposed external limits, or imposed internal limits. Quantitative disclosures should include total assets, total liabilities and amounts that are not available to meet cash demands within one year of the balance sheet date due to restrictions.

Reporting Expenses by Function and Nature

Reporting of expenses by both function and natural classification in one location will be required for all organizations on a separate statement, on the face of the statement of activities, or in the footnotes. The updated reporting may require changes in internal procedures to ensure that this level of detail is tracked to accurately comply with the requirement. Additional disclosures will also be required regarding methods used to allocate costs among program and support functions.

Presentation of Cash Flow Information

Under the new standard, exempt organizations may present operating cash flows using either the direct or indirect method and will no longer be required to present or disclose the indirect method of reconciliation if the direct method is used. This is intended to provide greater flexibility and the freedom to choose the method that best serves each entity’s informational needs.

Next Step

The FASB has stated that the overall expected benefits of the improvements justify the perceived costs that they may impose. A future second phase of the project will address additional issues surrounding whether and how to define a measure of operations and aligning measures of operations in the statement of activities with measures of operations in the statement of cash flows. There is currently no expected timeframe for the completion of the second phase.

Adoption of the standard will result in significant changes to financial reporting and disclosures. With early adoption permitted for future year ends and the final implementation deadline quickly approaching, we encourage exempt organizations to begin preparing for the transition.

We are here to help you navigate these changes.  Experts from Aronson’s exempt organization team will come together to discuss the impact this new standard may have on your organization.  We are offering a free webinar on Wednesday, October 26th, 2016 to explore some of the main issues and help participants begin to address compliance questions.