How Divorce Attorneys Can Leverage a Financial Advisor | Free Webinar

7 Must Know Changes in Nonprofit Financial Statement Reporting

By: Tricia Love Thomas

When the Financial Accounting Standards Board (FASB) issued long awaited changes to financial reporting for nonprofit organizations, it was a big deal because it was the first time in more than 20 years that FASB made major modifications. These new changes were designed to improve the usefulness of financial information for all users of nonprofit financial statements.

A little history – the new pronouncements became effective for annual financial statements issued for fiscal years beginning after December 15, 2017 and interim periods for fiscal years beginning after December 15, 2018. This gave nonprofits time to adopt the new pronouncements, though earlier application of the new standards was permitted.

Let’s get into the changes.

1. Classification of Net Assets

The biggest change to nonprofit financial reporting was a reduction of the classifications of net assets. The old rules required the use of three classifications, based on donor intent:

  • Unrestricted
  • Temporarily restricted
  • Permanently restricted net assets

However, the new rules require the use of only two categories: net assets with donor restrictions and net assets without donor restrictions. These new classifications must be used on both the statement of financial position and the statement of activities.

2. Liquidity

The new standards increased disclosure requirement in a few areas, one of them being the area of liquidity. The disclosures must now include qualitative disclosures, in addition to quantitative disclosures, regarding a nonprofit’s liquidity and how it plans to manage liquid resources to pay its bills over the next year. This disclosure isn’t limited to discussing only the liquid assets held at the end of the year; it also covers broader issues like how it has budgeted to cover changes in expenditures.

3. Statement of Cash Flows

After much debate and consideration, nonprofits are still allowed to use the direct or the indirect method of presenting the cash flow statement. This was part of a compromise between outright eliminating the indirect method and requiring the direct method. Nonprofits using the direct method are longer required to present or disclose the indirect method reconciliation.

4. Presentation of Expenses

The last major change to the actual financial statements, as opposed to the notes, is a requirement for the presentation of expenses by their natural classification as well as functional classification. This information must be presented in one location. That location can be on the face of the statement of activities, in a separate statement or in the notes to the financial statements. For most organizations it makes the most sense to present this information in a separate statement, which is the current practice for voluntary health and welfare organizations.

Get articles like this straight to your inbox by subscribing to our nonprofit blog.

5. Board Designated Asset Disclosures

Expanded disclosures regarding board designated assets (self-imposed vs donor intent) and net assets with donor restrictions as of the end of the reporting period are required. These disclosures should disclose information regarding the liquidity of the designated or restricted assets, as well as any limits from outside sources like contracts and grant requirements, in addition to any internally imposed limits. There should also be disclosures regarding how costs are allocated between program services and support services.

6. Endowment Fund Disclosures

Endowment fund disclosures must include information regarding any underwater endowment funds. These are investment funds where the fair value has decreased below the original amount of the gift or the amount required to be maintained by the donor. The disclosures need to address the nonprofit’s policy and actions regarding underwater funds, the current value of the funds as well as the original gift amount/required level by donor and the total amount of the deficiency.

7. Expenditures Related to Long-Lived Assets

When the original FASB nonprofit pronouncements 116 and 117 were issued in June 1993, there were a few areas where nonprofits had options in the manner of presentation, which have since been eliminated. For example, in the release of restrictions for expenditures related to long-lived assets (i.e., the restriction expired when the long-lived asset was purchased or constructed), the release from restriction was generally recorded. However, the former option allowing the release the restriction over the life of the asset as it depreciated has been eliminated.

Need Help?

This is only a brief summary of the 264-page FASB Accounting Standards Update 2016-14. If you have questions about how your nonprofit needs to comply with the rules, contact us online or call 800.899.4623.

New call-to-action

Published September 28, 2016

How to Strike Out Fraud In Your Organization

Shohei Ohtani is a household name in Major League Baseball. One of the league’s most formidable players, Ohtani is...

Businesses Employing Veterans Could be Eligible for Federal Award

If your business employs veterans, you might be eligible for a HIRE Vets Medallion Award. Businesses that earn this...