1 FASB Accounting Standards Update No. 2016-14, Presentation of Financial Statements of Not-for-Profit Entities. 3 FASB Statement No. 116, Accounting for Contributions Received and Contributions Made. 4 FASB Statement No. 117, Financial Statements of Not-for-Profit Organizations. Copyright © 2022 Deloitte Development LLC. All rights reserved. October 19, 2016 On August 18, 2016, the FASB issued Accounting Standards Update (ASU) 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities. The amendments in this ASU are intended to improve financial statement presentation by not-for-profit (NFP) organizations—a model that has existed for more than 20 years. The new guidance will affect substantially all NFPs, including charities, foundations, private colleges and universities, nongovernmental health care providers, cultural institutions, religious organizations, and trade associations, among others, and requires NFPs to improve their presentation and disclosures to provide more relevant information about their resources (and the changes in those resources) to their donors, grantors, creditors, and other users. There are qualitative and quantitative requirements in a number of areas, including net asset classes, investment return, expenses, liquidity and availability of resources, and presentation of operating cash flows. Practitioners and their NFP clients will need to be especially mindful of the enhanced and additional disclosures required by this ASU. Accordingly, our report will focus on these new disclosure requirements. Net Asset Classification In order to simplify the net asset classification scheme, the new guidance requires NFPs to present, on the face of the statement of financial position, the amount for each of two classes of net assets—net assets with donor restrictions and net assets without donor restrictions—as opposed to three. However, the guidance does retain current requirements to provide information about the nature and amounts of different types of donor-imposed restrictions, and also requires similar information about governing board designations. The disclosures are intended to highlight the importance of information about how those restrictions and designations affect the use of resources, including their liquidity. See the illustrative note disclosures at the end of this report for examples of these requirements. As part of the change to net asset classification, the amendments change how endowments that have a current fair value less than the original gift amount (or amount required to be retained by donor or by law), known as “underwater” endowments, are classified; rather than reducing unrestricted net assets for amounts by which endowment funds are underwater, those amounts will be reported within net assets with donor restrictions. The amendments also require disclosure of the aggregate amount by which the funds are underwater, the original gift amount (or amount required to be maintained by the donor or law), and any governing board policy or decisions to spend, or not spend, from such funds. See the illustrative note disclosures at the end of this report for an example of this requirement. CPEA Observation: NFPs also now will be required to use the placed-in-service approach (without specific donor restrictions stating otherwise) to report expira¬tions of restrictions on gifts of cash or other assets to be used to acquire or construct a long-lived asset; the option to imply a time restriction and release the restriction over an asset’s useful life (the “over-time” approach) will no longer be permitted. This change is intended to improve comparability and bet¬ter reflect the economics of such transactions. Information about Liquidity In order to provide more transparency, the new guidance includes requirements aimed at improving the ability of financial statement users to assess an NFP’s available financial resources and liquidity. Specifically, the amendments require disclosure of both quantitative and qualitative information about the availability of and how the NFP manages its liquid available resources to meet cash needs for general expenditures within one year of the balance sheet date. See the illustrative note disclosures at the end of this report for examples of these requirements. CPEA Observation: While note disclosures will still be needed, presenting a classified balance sheet may be an effective way for organizations to comply with many of the new liquidity disclosure requirements. Expense Presentation In order to make information about expenses more comparable and useful, the new guidance requires all NFPs (not just voluntary health and welfare organizations) to provide information about their operating expenses by both nature and function—on the face of the statement of activities, as a separate statement, or in the notes to the financial statements, supplemented with enhanced disclosures about the methods used to allocate costs among functions. See the illustrative note disclosures at the end of this report for an example of this requirement. Practice Note: While a separate statement of functional expenses is not required, it may be the most effective presentation option for NFPs with more than one program. CPEA Observation: A net presentation of investment expenses against investment return will be required on the face of the statement of activities; external and direct internal investment expenses will be netted against the investment return. A disclosure of the components of investment expense will no longer be required. Statement of Cash Flows In a departure from the FASB’s original exposure draft, which would have required the direct method, the new guidance allows NFPs to continue to present either the direct or indirect method of reporting operating cash flows. However, the presentation or disclosure of the indirect method reconciliation is no longer required if the NFP us¬es the direct method. The FASB hopes that the removal of the reconciliation requirement will encourage more NFPs to use the direct method. Effective Date and Transition The amendments are effective for annual financial statements issued for fiscal years beginning after December 15, 2017, and for interim periods within fiscal years beginning after December 15, 2018. Application to interim financial statements is permitted but not required in the initial year of application. Early application is permitted. The amendments should be initially adopted only for an annual fiscal period or for the first interim period within the fiscal year of adoption. NFPs will apply the ASU’s guidance retrospectively. If presenting comparative financial statements, an NFP can elect to omit the following information for any periods presented before the period of adoption: Which is a class of net assets for notPresently nonprofits use three net asset classifications: Unrestricted. Temporarily restricted. Permanently restricted.
Which of the following is not a net asset category reported by notWhich of the following is not a net asset category reported by not-for-profit entities? Restricted net assets.
How does the FASB require not14) The FASB requires not-for-profit organizations to report expenses by nature and function in the notes to the financial statements. 15) Board-designated net assets are net assets with donor restrictions the board sets aide for a specific purpose.
How does the FASB require notThe FASB Codification requires the following financial statements for all not-for-profit organizations: A. Statement of financial position, statement of activities, statement of cash flows, and statement of functional expenses.
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