Most nonprofit executives are focused on fundraising, service and program delivery, staff development and community relations. Ensuring the organization is well funded and staffed to provide the services needed to meet the mission statement is usually at the top of the list. So on the list of priorities, financial reporting may sometimes fall lower on the list. However, with recent changes to financial reporting regulations, nonprofits will need to assess their processes to ensure they comply. The new standard outlined in ASU 2016-14 makes key changes to several areas of the financial reporting process.
Background and Overview of ASU 2016-14
The purpose of ASU 2016-14 was to improve the usefulness and reduce the complexity of nonprofit financial statements. While the Financial Accounting Standards Board (FASB) determined that existing standards were adequate, more could be done to improve transparency and give nonprofits options on how best to report financial performance. ASU 2016-14 addresses issues with current financial reporting.
Issues with Nonprofit Financial Reporting
ASU 2016-14 addresses four key areas including the need for three classes of net assets, more transparent reporting of unrestricted and restricted net assets, resolution of period inconsistences and the use of indirect reconciliation method when presenting cash flow opportunities.
Changes to Net Assets
Instead of three net asset classes, nonprofits will now have two:
- Net assets with donor restrictions, and
- Net assets without donor restrictions.
There is no distinction between temporary and permanent restrictions, and new disclosure requirements for restricted assets must now include the amount and purpose of board-designated net assets and how any donor-imposed restrictions may affect the organization’s ability to use those resources.
It’s important to note that restricted assets also have additional reporting requirements. Nonprofits must use the placed-in-service approach to determine when restrictions expire. They are no longer permitted to recognize an asset’s restriction expiration over the asset’s useful life.
Expenses and Statement of Cash Flows
Nonprofits are still required to report functional expenses. This existing requirement is enhanced, as nonprofits must now also report expenses by nature. Both requirements should be presented in one location. Organizations can choose whether to report expenses in the statement of activities, a separate statement of expenses, or a schedule in the financial statement notes. Nonprofits can also choose either the indirect or direct method of reporting for the statement of cash flows; however, if using the direct method, it is no longer a requirement to reconcile changes in net assets to cash flows from operating activities.
New Liquidity Disclosures
New liquidity disclosures require nonprofits to disclose qualitative and quantitative information about how they manage liquid resources and availability of financial assets to meet immediate cash flow needs. Disclosures should include the nature of financial assets, external restrictions from donors, grantors, laws, or contracts as well as internal restrictions from the Board.
Nonprofits must implement these changes for annual financial statements issued for fiscal years beginning after December 15, 2017 and for interim periods within fiscal years beginning after December 15, 2018.
There are more details and considerations that nonprofits should make when implementing reporting changes. The information outlined above only represents a portion of changes made. For this reason, it’s essential to consult with a qualified professional who can guide you through the process. If you have questions about the changes or need assistance with an audit or tax issue, contact us today.
ABOUT THE AUTHOR
Dana is a Principal at Brown Schultz Sheridan & Fritz. As a key member of the Firm’s Auto Dealership Group, Dana assists dealerships with accounting, tax planning, operating and compliance issues, succession planning, and more.