As you should be aware, there’s a new FASB (Financial Accounting Standards Board) standard that amends FASB 117 on the presentation of financial statements for nonprofit entities. Officially it’s named ASU-2016-14; just “the ASU” will likely stick as the short-cut term. This has been several years in the making and is finally ready for voluntary early implementation, but mandatory for fiscal years starting after December 15, 2017.
Well, is this a big deal and what should the lead financial manager and the Board audit and finance committees for your organization be doing about it? I’d judge it as a medium-sized deal based on what will actually change. It’s definitely evolutionary, not revolutionary; although one wonders why the process took so long to deliver what is best termed a modest result. Follow this link to a summary article about the release. For a deeper dive into the original document, click here. The major areas are as follows:
- Classification of restricted from three net asset categories into two, eliminating separate treatment for endowments funds and leaving just the temporary restriction and unrestricted classifications. Board designations of unrestricted funds are still in play.
- More emphasis on providing information to assess liquidity of the entity.
- Showing investment return net of investment expenses.
- Showing expenses both by nature (GL) and function in the Statement of Activities with notes about allocation methodology.
- Eliminate the need for showing reconciliation of changes in net assets to cash provided when using the direct method for cash flow.
- More disclosure of qualitative and quantitative information to better assess and communicate liquidity.
Given the lead time of a year or more there’s not much to do now, but to get educated and stay abreast as more details are communicated in the nonprofit financial arena and via your auditor. I encourage early adopters to comply in their fiscal year that ends before the mandatory compliance period. That will put them ahead of the game. Here is an article written by BDO about a survey they conducted among nonprofit clients to get their reactions and implementation plans.
The mechanics are pretty straight forward. Nonprofits with more robust accounting systems, such as Abila MIP Fund Accounting™, would simply reduce the net asset restriction codes from three to two via a report roll-up code that combines permanent and temporary restrictions. The system should already provide a matrix-like display of natural expenses classified horizontally by function or functional grouping. The rest is more an analysis and disclosure to better portray the financial health of the organization to stakeholders.
It’s likely that your auditing firm will provide additional information and guidance as the mandatory date grows closer. Take advantage of any outreach, seminars and webinars. We, at NFP Partners, may offer some organized guidance as well, stay tuned.
Lee Bengston, CPA