As part of our ongoing efforts to help you with nonprofit financial management, we’d like to share information on the recent FASB update. As you may recall, FASB issued Accounting Standards Update No. 2016-14 Not-for-Profit Entities, the first major change to Statement #117 since 1993. The feedback is in, and the changes took effect starting on December 15, 2017. It’s time to get up to speed and get your team ready for these changes. Are you ready?
The Impacts of FASB Statement #117
The changes begin to impact financial statements starting in 2018. The standards should be implemented during the calendar year 2018 or by the end of the fiscal year 2019.
The impacts on nonprofit financial management are as follows:
- Net assets are now two classes instead of three. The three classes of net assets—unrestricted, temporarily restricted, and permanently restricted—are going away. Instead of three, there are now two. The two classes, moving forward, are net assets with donor restrictions and net assets without donor restrictions. You may be thinking, “Wait, this isn’t new!” and you’d be right. Many nonprofits have already moved into these two categories since few used all three. However, this is now the standard. You may need to tweak or update your current net asset classes to adjust for this change.
- Enhanced disclosure relating to both classes of assets. Additional disclosure requirements apply to governing board designations, appropriations, or similar actions. If it results in self-imposed limits on the use of resources without donor restrictions, you may need to add additional disclosures. Some reading this may have already voluntarily disclosed information in the past, and that’s great. Now everyone is being held to the same standard and asked to document everything.
- Additional disclosure related to qualitative and quantitative aspects of liquidity. This change impacts nonprofit disclosures related to how you manage liquidity to meet short-term cash demands. This may impact how you handle reserves, cash management practices, and anything that influences how cash is handled to meet short-term demand. The nature of financial assets, limitations, and other important facts must be disclosed.
- You can now eliminate indirect cash flow reconciliation when direct method cash flow is presented. The direct method is preferred by many for-profit entities and, while not a requirement, has gradually become the standard. It is generally easier for the average person to understand. As such, nonprofits would be smart to adopt it. Under the new guidelines, if the direct method is presented, presenting indirect reconciliation is optional.
- Required presentation of both natural and functional classification of expenses and enhanced disclosure of expense allocation methodologies. The goal is simply to improve comparability across not for profit financial statements by addressing differences in practice.
- Show the nature and function of each expense in the same location. Functional expenses, which show the natural and functional categories of the expense, should be shared in the same location. It doesn’t matter if it’s in the notes or on the page, just put them near each other.
- Report investment returns net of external and direct internal investment expense. You’re no longer required to report the amount of investment expenses. All nonprofits are now asked to report investment returns as net of external and direct internal investment expense. By making this a guideline that now applies to all nonprofit financial management, it helps make comparisons easier across all nonprofit entities.
- Changes to restrictions on gifts. Right now, unless a donor states specifically how a gift can be used, you can use that gift for long-term assets. Now such restrictions must be released when the long-lived asset is used instead of a service. If your nonprofit used to release over time, you’ll see a bigger impact than others.
As with all changes to FASB standards, it’s a good idea to speak with a CPA or an accounting for nonprofit firm. Beck & Company is a certified public accounting firm serving the greater Washington D.C. area and the Eastern seaboard. We offer consulting services, auditing, and software selection to help nonprofits with their accounting needs. Contact us today for more information or assistance.