The Financial Accounting Standards Board (FASB) has rolled out the red carpet for the first major changes to its standards for nonprofits’ financial statement presentation in more than two decades: Accounting Standards Update 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities. The new mandate is intended to clarify net asset classification requirements. In turn, users of nonprofits’ financial statements can more easily understand how not-for-profit organizations manage their funds.
New Net Asset Classifications
One of the more noteworthy changes is the replacement of the existing three net asset classes – unrestricted, temporarily restricted, and permanently restricted – with two new classes: net assets with donor restrictions and net assets without donor restrictions.
Net assets with donor restrictions includes what was previously reported as temporarily restricted and permanently restricted with differences in the nature of the restrictions disclosed in the notes. Unrestricted net assets are now reported as net assets without donor restrictions.
Along with the revised net asset classes come changes in how specific items are reported. One such revision accounts for regulatory changes that allow nonprofits to spend from an “underwater endowment,” or a permanently restricted donation whose fair market value is less than the original endowed gift amount. Under the new guidance, nonprofits must categorize such funding as net assets with donor restrictions. Another notable change is the method for handling the expiration of restrictions on gifts used to purchase or construct buildings and other long-lived assets. Nonprofits must reclassify these as net assets without restrictions when the assets are placed in service rather than releasing the restrictions over their useful lives. Consequently, organizations cannot match the depreciation expense with the release of the restricted assets unless stipulated by the donor.
Liquidity Information and Available Resources
The new standard includes specific requirements to help financial statement users more accurately assess a nonprofit’s available resources. Organizations must provide:
- Qualitative information that indicates how they manage their liquid available resources to meet cash needs for general expenses within one year of the balance sheet date, and
- Quantitative information that shows the availability of their financial assets at the balance sheet date to meet cash needs for general expenses within one year.
Many factors can affect an asset’s availability. These include internal limitations imposed by the nonprofit board’s decisions; the nature of the asset itself; and external limits imposed by donors, grantors, and laws. For board designations or other internal limits without donor restriction, disclosures in the financial statements are required.
Expenses and Operating Cash Flows
The new standard requires nonprofits to report expenses by both function (which is already required) and nature. In doing so, organizations show how the nature of particular expenses (e.g., salaries and wages, employee benefits, supplies, and rent) relates to their functions (e.g., program services or supporting activities). Organizations can present this categorization on a separate statement, on the statement of activities or in the note disclosures. This information will help financial statement users assess the degree to which expenses are discretionary or fixed, how the nonprofit allocates related resources, and the costs of the provided services.
Just as nonprofits have options for where they list their expenses, they may also choose whether to use the direct method or the indirect method to report their cash flows. Furthermore, organizations that opt for the direct method no longer need to include an indirect method reconciliation. Although both methods display the same data, the new guidance allows an organization to select the presentation method that best serves the need of the entity, providing great flexibility in financial reporting.
Nonprofit Financial Statement Presentation Standard
If this standard has you nervous for opening night, then please contact CRI’s nonprofit CPAs and advisors if you have questions about how this new standard affects your organization’s financial statements.