The Financial Accounting Standards Board, also known as FASB, has released Accounting Standards Update (“ASU”) 2016-14 with huge changes for Not-for-Profit Entities (“NFPs”). You’re probably wondering why there even was an update. Great question.
FASB had a plan to improve the current net asset classification requirements and the information presented in financial statements, as well as notes on NFP liquidity, financial performance, and cash flows. The old standards weren’t really donor-friendly, and this update addresses those concerns.
What is changing?
The main problems FASB wanted to address include: 1) complexities of net assets; 2) deficiencies in the transparency and utility of useful liquidity information; 3) inconsistencies in the type of information provided about expenses in each period; and 4) impediment of cash flow statement reconciliation when the direct method is used.
Does this affect you? Let’s see.
Nongovernmental entities such as charities, foundations, colleges and universities, and trade associations, but not entities who have investor-owned interests, are among those affected. Does the NFP receive aid from lenders, bondholders, donors, and grantors? This is for you.
How is this an improvement?
Not making a distinction between permanently restricted and temporarily restricted resources reduces complexity. Enhanced disclosure in the notes to financial statements is beneficial. Allowing either the direct or indirect method of cash flows increases flexibility in determining the most useful representation for donors. Requirements of investment return net of external and direct internal investment expenses reporting offers a more similar measure of investment returns across all NFPs. And requirements of a placed-in-service approach for reporting expirations of restrictions of gifts, cash, and other assets used on long-lived assets improves comparability and practicality.
When will the change happen, exactly?
Amendments in the update are effective immediately. (Just kidding; don’t panic.) They are 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.
Seek the services of a legal or tax adviser before implementing any ideas contained in this blog.