The Financial Accounting Standards Board (“FASB”) has released Accounting Standards Update 2016-14, Not-For-Profit Entities (Topic 958) and Healthcare Entities (Topic 954): Presentation of Financial Statements of Not-for-Profit Entities. This standard is the result of Phase I of FASB’s project to revamp how not-for-profits report financial information.
Who will be affected?
All organizations who follow FASB not-for-profit rules
What is changing?
Significant elements of the new standard include:
- A requirement to classify net assets into two categories: net assets without donor restrictions and net assets with donor restrictions. The old terms “unrestricted”, “temporarily restricted”, and “permanently restricted” are eliminated.
- Shifting the amount by which permanent endowments are underwater from net assets without donor restrictions to net assets with donor restrictions and requiring expanded disclosures on underwater endowments.
- Allowing free choice between the direct method and the indirect method of cash flows and no longer requiring an indirect reconciliation when the direct method is presented.
- A requirement to provide quantitative disclosures on how a not-for-profit manages its liquidity and quantitative disclosures on the availability of a not-for-profit’s financial resources as of the balance sheet date to meet its cash needs for general expenditures within one year.
- A requirement to report functional expenses disaggregated by natural classification. This could be accomplished either through a statement of functional expenses or as a footnote disclosure.
- A requirement to provide qualitative disclosures about the methods used to allocate costs among program and support functions. Additionally, the new standard provides new guidance on allocations of expenses from management and general by introducing the key concept of “direct conduct” or “direct supervision.”
When is this effective?
The new standard will be effective for fiscal years beginning January 1, 2018 and must be applied retrospectively to all periods presented.
We’re here to help you navigate these changes
Experts from Plante Moran’s not-for-profit, healthcare, and higher education teams have assembled to help explain the changes and the impact they may have on your organization.
We are offering a free, CPE-eligible webinar to explore some of the main issues and help participants begin to address compliance questions.