FASB modifies not-for-profit accounting rules

By Ken Tysiac

FASB issued a new accounting standard Thursday 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. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities, decreases 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 new standard began taking shape after FASB formed its Not-for-Profit Advisory Committee (NAC) in 2009 in an effort to keep the board informed on not-for-profit perspectives in financial reporting. The NAC advised that certain areas of the not-for-profit financial reporting model could be improved.

The NAC recommended standard-setting action that would change how net assets are presented, provide better information for assessing liquidity of a not-for-profit, and require presentation of a measure of the results of operations. After obtaining extensive feedback, issuing an exposure draft in April 2015, and redeliberating, FASB decided to move forward with the change to the net asset classifications and the additional disclosures about liquidity.

FASB deferred the issue of an operating measure to what it calls Phase Two of the project, partly because of concerns over the measure that was proposed and partly because of a desire to use research that's part of a current FASB project to address performance reporting for for-profit entities.

FASB member Larry Smith said in an interview that the new standard presents the availability of funds for nonrestricted purposes better than the current financial model does.

"I think the liquidity presentation goes a long way in enabling users to see what is really available versus what assets are effectively earmarked for either something a donor has restricted or that the board has designated in terms of a special project," Smith said.

The standard contains targeted improvements rather than a wholesale change to the reporting model for not-for-profits and can be implemented without high costs, Smith said. He said that eliminating the previous three net asset categories (unrestricted, temporarily restricted, and permanently restricted) in favor of two categories will simplify information for financial statement users.

"We didn't see a great difference in something that's temporarily restricted versus permanently restricted," Smith said. "It's restricted. And we thought it was a lot easier for people to understand that notion."

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, including a webcast on applying the new standard, that is scheduled for Sept. 28.

Ken Tysiac (ktysiac@aicpa.org) is a JofA editorial director. Senior editor Neil Amato (namato@aicpa.org) contributed to this report.

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