In August 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-14. This document, entitled, “Presentation of Financial Statements for Not-for-Profit Entities” changed how information is presented in financial statements. The goal was to make information clear and easily understandable for the average person reading a nonprofit’s financial statements.
Areas that the new standards address include:
* Net asset restrictions: The previous categorization of net asset classifications confused many people, especially the term “unrestricted.” The new net asset restrictions bring the categories down from three to two to provide clarity.
* Liquidity: It was difficult under the old standard for people to see liquidity and compare liquidity amounts among various nonprofits.
* Cash flow: Previously, indirect reporting was required, but reviewers found that indirect reporting methods confused many people.
* Expenses: Not all nonprofits reported expenses the same way.
The Changes: Nothing New to Track, Simpler Reporting
The changes required by FASB for nonprofit accounting do not ask for any new information to be recorded or tracked. Instead, it simplifies the method of reporting and recording, streamlining it so that it is more consistent among nonprofits. This enables donors, members, and the public an easier way to compare nonprofit organizations and understand their finances.
The biggest changes are the net asset classifications, disclosure, and expense designation
1. Net asset classification: As previously stated, net asset classifications are changing from three previous potential classifications to two. The two new categories are net assets with donor restrictions and net assets without donor restrictions. Details about the categories are disclosed in the footnotes. The footnotes are expected to provide detail on the funds themselves and how they are apportioned.
2. Liquidity disclosure: On the liquidity disclosure, the new rules require that qualitative details communicate how the nonprofit manages the liquid resources available to meet its cash flow needs within a one year period. Quantitative information must also be provided about the resources available within one year. Additional information is required on the nature and type of liquid assets and any external limitations placed on them by grantors, donors, local laws, etc. Board limits must also be specified.
3. Expenses: Expenses must now be disclosed by natural and functional categories. The methods used to allocate costs must also be described.
The changes recommended by FASB aren’t a surprise, but are long in coming. The continual push to improve communications around financials for nonprofit entities is a welcome one that adds a layer of transparency to the nonprofit world that donors have been seeking.
If you’d like assistance meeting the new FASB requirements, speak with Welter Consulting today. We offer software and services that can help you with your accounting needs. Please contact Welter Consulting at 206-605-3113 for more information.