FASB is hoping the changes in Accounting Standards Update (ASU) 2016-14 will encourage nonprofits to provide more relevant information and narrative in their financial statements. The changes are effective starting with December 31, 2018 year ends, so it’s a good idea to understand how these changes will impact your organization.
We encourage nonprofit organizations not to wait to become familiar with the accounting update, so we’ve highlighted the major changes that you’ll want to know about.
Net Assets Classifications
Net assets are currently tracked and reported in three classes: permanently restricted, temporarily restricted, and unrestricted. With the recent change, these reporting classifications have now shrunk to just two classes: net assets without donor restrictions and net assets with donor restrictions. Nonprofits are also required to disclose additional information about net assets with donor restrictions. However, this change is only for reporting practices. Your accounting practices won’t change – you will still need to track temporary and permanent restrictions and activity.
Liquidity and Availability
Perhaps the most significant new requirement has to do with disclosures regarding liquidity and availability of resources. Nonprofits will be required to provide more detailed information about how they manage liquid resources (liquidity), and what is available to fund operations in the next 12 months (availability). The ASU provides much flexibility as to how this information is presented, so organizations will want to consider what is most useful for their constituency. For example, organizations will want to think about how best to present information regarding when investments are sold to meet cash flow needs, or how spending policies for endowments provide funds for operations.
In the past, only voluntary health and welfare organizations were required to report information about expenses for categories such as programs, management, and fundraising (recognized as functional categories). With the new ASU, all nonprofits will have to report expenses by function and nature. Additionally, nonprofits will have to disclose the methodology used for allocating general and administrative expenses to programs.
Another change in the ASU is how investment returns are reported. Investment expenses (including all external and direct internal expenses) will be netted against investment returns for financial statement presentation. The ASU also eliminates the requirement to disclose the composition of investment returns (realized, unrealized, dividends & interest).
Statement of Cash Flows
The ASU permits nonprofits to present operating cash flows using either the direct or indirect method, and it eliminates reconciliation of the change in net assets to net cash provided by operating activities if the nonprofit elects to apply the direct method. The idea with this change is to encourage nonprofits to choose the direct method.
If you haven’t addressed how ASU 2016-14 will impact your nonprofit’s financial operations and reporting, we encourage you to contact us for help. Stacy Smith, CPA, Audit Shareholder in Mize Houser’s Nonprofit practice, is ready to answer questions about how to address these changes.