In August of 2016, the Financial Accounting Standards Board (FASB), at the suggestion of its Not-For-Profit Advisory Committee, issued a new standard (ASU 2016-14) intended to simplify and improve the presentation of financial statements and classification of net assets. The new standard also makes improvements to the notes about liquidity, performance and cash flows. Here are the answers to some common questions that I hope you find helpful.
What are the key changes?
1. Net Asset Classes will move from the current three classes of Unrestricted, Temporarily Restricted, and Permanently Restricted to two classes: Net Assets with Donor Restrictions and Net Assets without Donor Restrictions. This effectively lumps temporary and permanent restrictions into one classification. There will be enhanced disclosures on the composition of restricted funds and any self-imposed limits on unrestricted funds.
2. Investment Returns will be shown as a net return, eliminating the requirement to disclose the investment expenses netted against gross returns.
3. Expenses will now be presented by nature (new) as well as by function (existing) and will include an analysis of how resources are used. The analysis will be supplemented with a disclosure about expense allocation methods.
4. Liquidity and Availability of Resources will be addressed with two required disclosures: qualitative information about management of liquid resources, and quantitative information about availability of assets to meet cash needs within one year of the balance sheet date.
5. Statement of Cash Flows can still be presented on the direct or indirect method, but if using the direct method, the reconciliation from change-in-net-assets to cash is no longer required.
Why make these changes?
Simplifying the financial statements and enhancing the notes/disclosures will allow donors, grantors, creditors, and others to better assess an organization’s ability to meet cash needs for general operating, liquidity and flexibility, financial performance, longevity and general stewardship performance.
When will the Standard go in to effect?
ASU 2016-14 is effective for annual financial statements issued for fiscal years beginning after December 15, 2017, and for interim periods within fiscal years beginning after December 15, 2018. Early application is permitted.
How do I prepare?
If you have not previously done a statement of functional expenses, you need to start planning now for how to obtain the necessary information. Whether you will do this via direct-allocation as expenses are recorded or using an indirect-allocation during the statement preparation process, changes to your chart of accounts structure and/or internal controls may be necessary to properly allocate these expenses by nature and function. Speak with your auditor about the potential impact to your particular organization, and as always, Insource is here to help you navigate the changes to these standards.
For more information, please contact Saleha Walsh or Russell Greenwald at 781-235-1490.