Upcoming changes to the presentation of financial statements for not-for-profits
In March 2018, Plante Moran hosted the Chicagoland Social Service Finance and Accounting Roundtable. This group addressed many of the unique issues not-for-profit organizations face and includes directors and managers in accounting and finance roles of several not-for-profit organizations in the area. One key topic of discussion was the upcoming changes in not-for-profit financial statements: the required disclosures about the liquidity and availability of resources and allocation rules and reporting requirement changes for functional expenses.
To put these updates into the context of larger standards updates, in August 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for Profit Entities.
One of the goals of the new standard is to provide better information to donors, creditors, and other users of the financial statements. To assist in meeting this goal, FASB added a requirement to disclose quantitative and qualitative information on how an organization manages its liquid resources available to meet cash needs.
Required disclosures about the liquidity and availability of resources
First, the ASU requires quantitative information about the organization’s financial assets to be used for general expenditures in the next year. More specifically, the disclosures should include information about:
- Amount of financial assets at the end of the period
- Amount of financial assets not available to meet cash needs in the near term
- Amount of financial liabilities that requires cash in the near term
The ASU also requires qualitative information to communicate availability, or specifically how the organization plans to manage its liquid resources in order to meet cash needs in the upcoming year. These disclosures will need to include information about minimum cash balance goals, use of any lines of credit, and the organization’s policy for managing excess cash. The ASU provides examples of both quantitative and qualitative disclosures.
Immediate next steps
Knowing these requirements helps you prioritize and plan: Review your organization’s cash balance goals and policies for managing excess cash now.
If your policies surrounding cash are not up to date or formalized, now is the perfect time to make any strategic changes.
Allocation rules and reporting requirement changes for functional expenses
Another change in the ASU relates to the presentation and disclosure of expenses. This ASU introduces a requirement to present expenses by nature and function as well as an analysis of these expenses in one location. The analysis can be presented on the face of the statement of activities, in a separate statement, or in notes to the financial statements.
Under current standards, not-for-profit entities must present expenses by function. It’s common to see expenses on the face of the statement of activities presented by their nature (such as salaries, supplies, professional fees, depreciation, and interest), while the presentation of expense function is presented within a footnote disclosure.
The FASB believed this disjointed presentation didn't provide financial statement users with enough valuable information as to how an organization spends its resources. As a result, the ASU requires not-for-profits to present this information together in one location on the financial statements.
Additionally, enhanced disclosures about the methods used to allocate costs among functions are required to supplement the expense analysis. The ASU provides a sample disclosure for describing the methods used for allocation of expenses from management and general activities.
Finally, the ASU now more clearly defines what expenses are classified as management and general activities — items not identifiable with programs, fundraising, or membership development activities.
(Program-related expenses include the activities that result in goods and services being distributed to beneficiaries, customers, or members that fulfill the purposes or mission for which the organization exists.) With this change, we would expect to see a decrease in the types of expenses allocated from management and general activities since the expense will have to be clearly related to a specific program in order for it to qualify as a program-related expense.
Another one of FASB’s goals within this ASU is to clarify which expenses directly link to program services, fundraising, or membership development activities. Therefore, FASB provided specific examples of management and general activities to eliminate the gray area. These examples include business management, general record keeping and payroll, budgeting, employee benefits management and oversight (human resources), and all other management and administration except for direct conduct of program services. A complete list is included in the ASU. Organizations completing their expense analysis with these new specific rules may find more expenses are classified as management and general now than before.
Immediate next steps
As your organization considers how to adopt this provision of the standard, it's important to note there is no requirement as to the amount of functional expense categories to be included in the analysis. For some organizations, the primary functional expense classifications may be program services and management and general activities. The extent of classification and subclassification expense for program expenses depends on many factors, such as the nature and complexity of organization.
ASU No. 2016-14 is effective for years beginning after December 15, 2017, and must be applied on a retrospective basis. Don't wait to evaluate the impact and plan for the changes.