FASB Overhauls Guidance on Presentation of Financial Statements for Not-for-Profit Entities
On August 18, 2016, the FASB issued ASU 2016-14,1 which significantly changes the presentation requirements for financial statements of not-for-profit entities (NFPs). The amendments are intended to improve the guidance on net asset classification as well as the information presented in the financial statements and financial statement notes regarding liquidity, financial performance, and cash flows for NFPs. Specifically, the ASU addresses (1) the complexity and understandability of net asset classifications, (2) the lack of consistency in the type of information provided about expenses, and (3) inconsistencies in the reporting of (a) operating information in the statement of activities and (b) operating cash flows in the statement of cash flows.
The ASU amends the guidance in ASC 9582 as well as certain requirements in ASC 954.
Many of the ASU’s requirements differ significantly from those in existing U.S. GAAP. For example, the ASU requires NFPs to disclose new information that, in some cases, may be difficult to obtain. Accordingly, NFPs are encouraged to consider whether they will need to make systems changes, or changes to their internal control over financial reporting, to comply with the new guidance.
Main Provisions of the ASU
Under existing U.S. GAAP, three classes of net assets — unrestricted, temporarily restricted, and permanently restricted — are presented in the statement of financial position. However, in addition to total net assets, the ASU requires NFPs to present in the statement of financial position at the end of the period only two classes of net assets — net assets with donor restrictions and net assets without donor restrictions. See Appendix A for an example of how an NFP would adjust the presentation of net assets in its statement of financial position to reflect these two classes instead of the three classes required under current guidance.
The FASB decided that the complexity of distinguishing between permanent and temporary restrictions is unwarranted and that better information can be obtained from enhanced disclosures about the nature, amounts, and effects of the various types of donor-imposed restrictions, including information about the purposes for which the resources can be used and the time frame of their use.
Statement of Activities
The ASU requires an NFP’s presentation, in the statement of activities, of the change in each of the two new classes of net assets to be similar to its presentation under current guidance of the change in each of the three net asset classes. See Appendix B for a sample presentation of an NFP’s statement of activities that shows the two new subtotals required under the ASU.
Further, when reporting expenses, NFPs must disclose information about the nature and function of the expenses in accordance with their functional classification, such as major classes of program services and supporting activities.
Statement of Cash Flows
Under the ASU, an NFP that chooses to use the direct method of cash flow reporting is no longer required to present or disclose the indirect method reconciliation. NFPs will continue to have the option to present their statement of cash flows by using either the direct method or indirect method.
Reporting of Net Investment Returns and Reporting Expirations of Restrictions
NFPs are no longer required to disclose the netted expenses when reporting investment returns. The ASU also limits the type of expenses that are appropriate to include in a report of net investment returns.
Since under the ASU NFPs no longer have to disclose netted expenses, the difficulties and costs associated with identifying embedded fees in investment expenses are eliminated.
Further, in reporting expirations of restrictions on gifts of cash or other assets to be used to acquire or construct a long-lived asset, entities must now use the placed-in-service approach when there are no explicit donor stipulations. The ASU thus eliminates the option under current guidance that allows entities to release the donor-imposed restriction over the estimated useful life of the acquired asset.
The ASU enhances the disclosure requirements for NFPs. As a result, such entities must present the following:
- “Amounts and purposes of governing board designations, appropriations, and similar actions that result in self-imposed limits on the use of resources without donor-imposed restrictions as of the end of the period.”
- “Composition of net assets with donor restrictions at the end of the period and how the restrictions affect the use of resources.”
- “Qualitative information that communicates how an NFP manages its liquid resources available to meet cash needs for general expenditures within one year of the balance sheet date.”
- “Quantitative information, either on the face of the balance sheet or in the notes, and additional qualitative information in the notes as necessary, that communicates the availability of an NFP’s financial assets at the balance sheet date to meet cash needs for general expenditures within one year of the balance sheet date.”
- “Amounts of expenses by both their natural classification and their functional classification.”
- “Method(s) used to allocate costs among program and support functions.”
- “Underwater endowment funds, which include required disclosures of (1) anNFP’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 net assets with donor restrictions.”
Effective Date and Transition
The ASU’s amendments are effective for fiscal years beginning after December 15, 2017, and for interim periods within fiscal years beginning after December 15, 2018. Early adoption is permitted.
Entities will apply the ASU’s guidance retrospectively, but its application to interim financial statements is not required in the initial year of adoption. If presenting comparative financial statements, an NFP can elect to omit the following information for any periods presented before the period of adoption:
- “Analysis of expenses by both natural classification and functional classification (the separate presentation of expenses by functional classification and expenses by natural classification is still required). NFPs that previously were required to present a statement of functional expenses do not have the option to omit this analysis; however, they may present the comparative period information in any of the formats permitted in this Update, consistent with the presentation in the period of adoption.”
- “Disclosures about liquidity and availability of resources.”
Appendix A — Statement of Financial Position Showing Revised Net Asset Classes
The example below, which is reproduced from the ASU, illustrates how an NFP would adjust the presentation of net assets in its statement of financial position to reflect two classes rather than the three classes required under current guidance.
Note: See paragraph 958-205-55-21 for the notes to financial statements.
Appendix B — Statement of Activities Showing Two New Subtotals
The example below, which is reproduced from the ASU, illustrates how an NFP’s statement of activities would be presented to reflect two additional subtotals for activities associated with changes in net assets without donor restrictions.
Note: See paragraph 958-205-55-21 for the notes to financial statements.
FASB Accounting Standards Update No. 2016-14, Presentation of Financial Statements of Not-for-Profit Entities.
For titles of FASB Accounting Standards Codification (ASC) references, see Deloitte’s “Titles of Topics and Subtopics in the FASB Accounting Standards Codification.”
FASB Statement No. 116, Accounting for Contributions Received and Contributions Made.
FASB Statement No. 117, Financial Statements of Not-for-Profit Organizations.