FASB modifies not-for-profit accounting

The new standard changes net asset classifications and liquidity disclosures.

FASB issued a new accounting standard that is designed to help not-for-profits tell their story through their financial statements.

Not-for-profit financial statements have been prepared under FASB's current guidance since 1993. The new standard changes presentation and disclosure requirements with the intention of helping not-for-profits provide more relevant information about their resources—and the changes in those resources—to donors, grantors, creditors, and other financial statement users.

"While the current not-for-profit financial reporting model held up well for more than 20 years, stakeholders expressed concerns about the complexity, insufficient transparency, and limited usefulness of certain aspects of the model," FASB Chairman Russell Golden said in a news release. "The new guidance simplifies and improves the face of the financial statements and enhances the disclosures in the notes."

Accounting Standards Update No. 2016-14Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities, reduces the number of net asset classes from three to two. The new classes will be net assets with donor restrictions and net assets without donor restrictions.

The standard also:

  • Requires reporting of the underwater amounts of donor-restricted endowment funds in net assets with donor restrictions and enhances disclosures about underwater endowments.
  • Continues to allow preparers to choose between the direct method and indirect method for presenting operating cash flows, eliminating the requirement for those who use the direct method to perform reconciliation with the indirect method.
  • Requires a not-for-profit to provide in the notes qualitative information on how it manages its liquid available resources and liquidity risks. Quantitative information that communicates the availability of a not-for-profit's financial assets at the balance sheet date to meet cash needs for general expenditures within one year is required to be presented on the face of the financial statement and/or in the notes.
  • Requires reporting of expenses by function and nature, as well as an analysis of expenses by both function and nature.

The standard will take effect for annual financial statements issued for fiscal years beginning after Dec. 15, 2017, and for interim periods within fiscal years beginning after Dec. 15, 2018. Application to interim financial statements is permitted but not required in the initial year of application, and early application of the standard is permitted.

The AICPA Not-for-Profit Section has information about the standard and is developing resources.

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