On August 18, 2016, the FASB completed Phase I of its Presentation of Financial Statements of Not-for-Profit Entities project by issuing ASU No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities. The new guidance simplifies and improves how not-for-profit entities classify net assets as well as the information presented in financial statements and notes about liquidity, financial performance, and cash flows.

To that end, the new guidance:
  • Improves how not-for-profits communicate their financial performance and condition to stakeholders.
  • Reduces costs and complexities in preparing financial statements.
  • Provides more relevant information about resources and changes in resources of not-for-profits by simplifying the face of financial statements and enhancing disclosures in the notes.
  • Improves users’ assessments of liquidity, financial performance, availability of resources to meet cash needs for general expenditures, service efforts and ability to continue to provide services, and execution of stewardship responsibilities and other aspects of management performance.
Specifically, the new guidance:
  • Revises the net asset classification scheme to two classes (net assets with donor restrictions and net assets without donor restrictions) instead of the previous three.
  • Enhances disclosures for self-imposed limits on the use of resources without donor-imposed restrictions and the composition of net assets with donor restrictions.
  • Updates the accounting and disclosure requirements for underwater endowment funds.
  • Requires net presentation of investment expenses against investment return on the statement of activities and eliminates the requirement to disclose investment expenses that have been netted.
  • Requires the presentation of expenses by nature as well as function, including an analysis of expenses showing the relationship between functional and natural classification for all expenses.
  • Requires qualitative disclosures on how a not-for-profit manages its available liquid resources.
  • Requires quantitative disclosures that communicate the availability of financial assets to meet cash needs for general expenditures within one year of the balance sheet date.
  • Allows for a choice between the direct and indirect method of reporting operating cash flows; presentation of the indirect reconciliation is no longer required if using the direct method.
The new guidance affects not-for-profit organizations and the users of their general purpose financial statements. Not-for-profit organizations that will be affected include charities, foundations, colleges and universities, health care providers, religious organizations, trade associations, and cultural institutions, among others.

Effective Dates

The amendments in the standard 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 of the amendments in this Update is permitted. 

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