In August 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-14: Not-for-Profit Entities (Topic 958) – Presentation of Financial Statements of Not-for-Profit Entities. The updates went into effect for fiscal years starting after December 15, 2017.
The new standards include the changes in the following key areas:
1. Donation Classifications
Restricted donations are donations to which the donor has attached certain stipulations (e.g., purpose for which the money must be used or time period within which it must be used). Nonprofits must make it clear in their reporting which donations are restricted and which are not. Prior to ASU 2016-14, the FASB standard for contribution reporting allowed for three categories: unrestricted, temporarily restricted, and permanently restricted. The FASB update included an adjustment to restricted contribution terminology, paring it down to two categories: assets with and without donor restriction.
2. Board Restrictions
In addition to donor-imposed restrictions, nonprofits also sometimes encounter board-imposed restrictions. The new FASB requirement states that all funds specifically designated by the board of directors must be disclosed, including both their amounts and purposes.
3. Liquidity Disclosures
The term “liquidity” describes the financial resources that an organization has readily available (e.g., the cash they have in the bank). It is a key concept because it is possible for an organization to have a positive bottom line but still find themselves incapable of paying the electric bill. Keeping track of your nonprofit’s liquidity is key, which is why FASB standards require specific disclosures regarding it. Nonprofits must disclose both quantitative and qualitative specifics of their organization’s liquidity. The updated standards require disclosures of the resources on hand to cover expenses and obligations for one year. This requires both specific numbers and a written narrative describing how the nonprofit manages its liquidity risks.
4. Underwater Endowments
Underwater endowment funds, which include required disclosures of 1) and NFP’s policy, and any actions taken during the period, concerning appropriation from underwater endowment funds, 2) the aggregate fair value of such funds, 3) the aggregate of the original gift amounts (or level required by donor or law) to be maintained and 4) the aggregate amount by which funds are underwater (deficiencies), which are to be classified as part of the net assets with donor restrictions.
5. Presentation of Expenses
When it comes to presentation of expenses, FASB updated standards to require greater details. Nonprofits are required to present their expenses by natural classification, as well as with an analysis of expenses by function. It also requires disclosure methods used to allocate costs among program and support functions. This will require nonprofits to change the way they track expenses.
6. Property and Equipment Donations
ASU 2016-14 changes the timeline for releasing donor restrictions on assets. Previously, GAAP allowed three methods to account for releases of donor restrictions related to property and equipment: 1) released as dollars were spent, 2) placed-in-service approach, or 3) imply a time restriction and release notably over the useful life of the asset. The update requires that restrictions be released when assets are placed in service.
These standards updates require significant changes. Nonprofit organizations should seek the advice of an accounting professional as they strive to adhere to the new standards.
For more details, read the standards in full on the FASB website.