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New financial reporting standards for nonprofits aimed at greater transparency

Nov 29, 2016

By William B. Ford, CPA, and Linda J. Kramer, CPA, MBA

You may have heard that new financial reporting standards are coming down the pike that will affect your nonprofit organization. The good news is that the new standards don’t take effect for more than a year, giving you plenty of time to familiarize your organization with any new requirements.

The Financial Accounting Standards Board (FASB) has issued Accounting Standards Update (ASU) 2016-14, Presentation of Financial Statements for Not–for-Profit Entities. This ASU is the first phase of a two-phase project and is intended to make nonprofit financial reporting more transparent.

Specifically, the new standards will improve net asset classification requirements and information presented in the financial statements and notes about a nonprofit entity’s liquidity, financial performance and cash flows.

The changes are effective for organizations with fiscal years beginning after December 15, 2017, although early implementation is permitted. These amendments should be applied on a retrospective basis. The nonprofit has the option to omit certain information for any period presented before the period of required adoption.

Main provisions

  • The current presentation of three categories of net assets (unrestricted, temporarily restricted and permanently restricted) will be reduced to two categories. Net assets without donor restrictions and net assets with donor restrictions.
  • The statement of activities also will reflect two classes of net assets.
  • Cash flows will continue to be presented using either the direct or indirect method with the requirement to reconcile the direct method being eliminated.
  • Enhanced disclosures will be required for amounts and purposes of any board-designated amounts or appropriations.
  • Enhanced disclosures will be required for composition of donor-restricted net assets at the end of the period and for how those restrictions affect the use of resources.
  • Disclosure will be required to communicate how the organization manages its liquid resources available to meet cash needs for general expenditures during the next year.
  • Expenses will be presented by both natural classification and functional classification. This may be done within the statement of activities, as a separate statement, or in the notes.
  • Disclosures will be required concerning the methods used to allocate costs among program and support functions.
  • Underwater endowment funds will be reported as part of net assets with donor restrictions; previously these were reported with unrestricted net assets.
  • Investment returns will be shown net of external and direct internal investment expenses with no disclosure necessary for the amount of the expenses.
  • Release of net assets with donor restrictions for long lived assets will be required when the asset is placed in service, thus eliminating the option of release over the estimated useful life of the asset.

While these standards will not take effect for more than a year, a review of your organization’s financial reporting practices may be beneficial. We plan to address each client’s needs individually, and will be talking about that in upcoming meetings. For organizations that are not clients of our firm, we are happy to answer questions, guide you in a review of your current practices, or assist you with implementation of the new accounting rules. Please contact us at 617-696-08900.

Bill Ford is the Director, Nonprofit Assurance & Advisory Services, and Linda Kramer is a Director of Accounting & Auditing.

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