For the past several years, changes have been in the works for the not-for-profit financial reports. The Financial Accounting Standard Board (FASB) believe that the changes will improve the financial statements and provide more useful information to the users of these statements.
The changes are effective for the year end beginning after December 15, 2017 – which means the effective year of an organization with a fiscal year ended June 30th – will be June 30, 2019 (the year beginning July 1, 2018, ending June 30, 2019).
Will you be ready?
Phase one of the implementation include several improvements – with five of the most significant changes noted as:
- Net asset classification
- Underwater endowments
- Liquidity information
- Cash flow presentation
- Functional expenses
Net Asset Classification:
From the current three level classification of unrestricted, temporarily restricted and permanently restricted – there will be two levels: with donor restrictions and without donor restrictions. The classification of unrestricted net assets and activities will remain unchanged as without donor restrictions. The with donor restriction classification will include both the temporarily and permanently restricted activities. Footnote disclosures will be required to include the timing and nature of the restrictions and the composition of the net assets at the end of the period as well as analysis of the restrictions.
Underwater relates to where the related investment value has fallen below the amount to be retained by donor or by law. Currently the amount considered underwater are classified against unrestricted activity. The change will reclassify these funds as with donor restrictions and will require expanded disclosures to include the original endowment amount and spending policy with comments on whether that policy has been followed.
To provide the users of the financial statements with an understanding of an organization’s risk exposure and how risk is managed, information about liquidity will be required. For example, presenting the statement of financial position in a classified manner – by identifying the current, long term and other classifications – may be an effective way to comply with this requirement.
Cash Flow Presentation:
Requirement of the direct method of the presentation of the cash flows which included the indirect method reconciliation of operating activities were noted in the preliminary discussions of changes being considered. The changes effective for this phase of the implementation provides that an organization may continue to present either the direct or indirect method and the indirect method reconciliation will no longer be required if the direct method is used.
Expenses by function (program, general & administrative and fundraising) and by natural classification (i.e. salaries, professional fees, occupancy, etc.) will be required for all organizations on a separate statement, on the face of the statement of activities or in the footnotes. A separate statement of functional expenses may be the most effective option.
These are five of the most significant changes included in this phase of the FASB updates for not-for-profit organizations financial reporting. There are several other changes that may affect your organization. Consider what you need to do in order be prepared for these changes. Talk with your auditor, read the authoritative guidance (FASB ASU No. 2016-14, Not-for-Profit Entities, Topic 958: Presentation of Financial Statements of Not-for-Profit Entities), participate in formal training sessions, and read articles of the expected practical applications.
With a little help from these resources and with some planning you can be better prepared for the changes.