The Financial Accounting Standards Board (FASB) has issued Accounting Standards Update "2016-14—Not-For-Profit Entities (Topic 958): Presentation of Financial Statements of Not-For-Profit Entities," which will impact all nonprofit entities. The accounting standard update (ASU) is the result of a determination by the FASB that financial statements of nonprofits could be improved to provide more useful information to donors, grantors, creditors, and others.

The amendments in ASU 2016-14 are the first of a two-phase project intended to make short-term improvements that address many of the issues identified by the FASB, including

• complexity in net-asset classification requirements
• deficiencies in transparency and utility of information regarding liquidity
• deficiencies in reporting of financial performance measures
• inconsistencies of reporting expenses by function and nature
• misunderstandings in presentation of cash-flows information.

The main provisions of the ASU address the problems identified by the FASB, among other changes.

Net Asset Classification Requirements

There are currently three classes of net assets—unrestricted, temporarily restricted, and permanently restricted—that will be combined into two. Unrestricted net assets will become "net assets without donor restrictions," while temporarily and permanently restricted net assets will collectively become "net assets with donor restrictions." The notes to the financial statement will include expanded information so the user will be able to understand the timing and nature of the restrictions and the composition of net assets with donor restrictions at the end of the period.

Underwater endowments will now be classified in net assets with donor restrictions instead of the current classification in unrestricted net assets. Expanded notes will also be required to disclose amounts underwater and to present plans for reducing or not spending from these funds.

At times an association's governing board will make designations or appropriations that result in self-imposed limits on the use of resources without donor restrictions. Enhanced disclosure information will be required on the amounts and purposes of these designations.

The placed-in-service approach will also be required for reporting the expiration of donor restrictions on resources used to acquire or construct long-lived assets, and the reclassification of amounts from net assets with donor restrictions to net assets without donor restrictions.

The FASB determined that financial statements of nonprofits could be improved to provide more useful information to donors, grantors, creditors, and others.

Transparency and Utility of Information Regarding Liquidity

New disclosures will need to be made regarding the management of liquidity and the financial assets available to meet near-term demands for cash. The disclosure will include both quantitative and qualitative information, including factors that may impact the financial availability such as the nature, imposed external limits, or imposed internal limits.

Specifically, the quantitative disclosures should include

• total amount of financial assets at the balance sheet date
• total amount of financial liabilities at the balance sheet date
• amounts that are not available to meet cash needs within the stated time horizon due to various restrictions, which include but are not limited to
  • its nature
  • external limits imposed by donors, laws, and contracts
  • internal limits imposed by governing board decisions.

However, the footnote disclosure is only required in circumstances where information is not apparent on the statement of financial position. Presenting a classified balance sheet may be sufficient for many organizations to comply with many of the new disclosure requirements.

Reporting of Financial Performance Measures

Associations will continue to report the change in total net assets for the period. They will also be required to report the amount of change in each of the two classes of net assets in the statement of activities. Presenting an intermediate measure of operations is still allowed, however enhanced disclosures will be required.

Investment income will now be reported after deducting external and direct internal investment expenses. The disclosure of investment expenses is permitted but will no longer be required.

Reporting Expenses by Function and Nature

Reporting of expenses by both function and natural classification in one location will be required for all associations: on a separate statement, on the face of the statement of activities, or in the footnotes. While a separate statement of functional expenses is not required, for associations with more than one program it may be the most effective presentation option. The updated reporting may require changes in internal procedures to ensure that this level of detail is tracked to accurately comply with the requirement. Additional disclosures will also be required regarding methods used to allocate costs among program and support functions.

Presentation of Cash-Flow Information

Under the new guidance associations may present operating cash flows using either the direct or indirect method and will no longer be required to present or disclose the indirect method of reconciliation if the direct method is used. This is intended to provide greater flexibility and the freedom to choose the method that best serves each entity's informational needs.

The FASB has stated that the overall expected benefits of the improvements justify the perceived costs that they may impose. A future second phase of the project will address additional issues surrounding whether and how to define the operations and aligning measures of operations in the statement of activities with measures of operations in the statement of cash flows. There is currently no expected timeframe for the completion of the second phase.

The effective date for the Accounting Standards Update is fiscal years beginning after December 15, 2017 (or the year ended December 31, 2018, for calendar year entities); however, early application is permitted. Adoption of the standard will result in significant changes to financial reporting and disclosures. With early adoption permitted for future year ends and the final implementation deadline quickly approaching, we encourage associations and nonprofits to begin preparing for the transition.