*** NOTE! This is the first post of many with regards to ASU 2016-14. This update is extensive and covers many asspects of your Accounting. Read ALL of our posts on the various ASU sections to be fully informed. Click here to see our additional posts on this topic.
Accounting Standards Update (ASU) 2016-14 -Presentation of Financial Statements of Not-for-Profit Entities
Recent changes have revamped generally accepted accounting principles (GAAP) that impact not-for-profit organizations and how these organizations present their financial statements. Before this modernization, FASB 116 and 117 guided not-for-profit financial reporting practices.
Why did the changes come about?
Why was it necessary to bring these topics
up to date?
For years, not-for-profit organizations have reported difficulties completing these forms because of complexities and inconsistencies. Those who assess the information about the organization thought the old financials were difficult to analyze.
The new plan offers more complete details that help donors, grantors and board members make informed decisions about the organization. FASB changed the three net asset classifications to two classifications to help not-for-profits better represent their organization.
When Is It Effective?
The new rules for presenting financial statements for not-for-profit (NFP) entities is effective for fiscal years beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. Early application is allowed. Therefore, if you are a calendar year end, it is for the year ending 12/31/2018 and if you are a fiscal year-end, you need to apply the changes to the fiscal year that ends in 2019.
Steps to get prepared:
1. Decide if your organization is going to early adopt the new provisions (this year 2018) or plan to adopt at the above noted effective date (next year 2019)?
2. Prepare a footnote disclosure regarding the change in accounting method.
3. Train those who work on financial statements on the changes in financial reporting.
4. Confer with your board, auditors and accountants to talk about the changes.
5. In the year of adoption, the NFP organization must reveal the nature of any re-classifications or re-statements and their impacts, if any, on changes in the net asset classes for each year reported. If this new net asset categories significantly impact your net assets, you must write an additional note concerning the nature and effects on changes in the net asset classes.
First Major Change: Net Assets
The old classes of net assets were unrestricted (UR), temporarily restricted (TR) and permanently restricted (PR). Donor restrictions pushed not-for-profits into one of these categories. Another confusing element included board-identified net assets or endowments and whether these assets are restricted.
The ASU’s latest procedure gets rid of the temporary and permanent net asset restrictions and uses only one category--”net assets with donor restrictions”. This modification renamed the current unrestricted group to “net assets without donor restrictions”. These changes restrict the organization’s financial statement report to only two choices.
Basic example:
Keep these changes in mind when preparing the balance sheet. You want to present the organization’s net assets in the best positive light. The statements give organizations options on how to present net assets. For example, would the users of your financial statements find a further disaggregation of net assets from the two required classes useful on the face of the statement of financial position? The two required net asset classes are a minimum classification line of action. An organization can opt to further disaggregate the two net asset classes. Additionally, an organization could decide to separate net assets with donor restrictions from those it anticipates holding in perpetuity and those it will spend for particular purposes.
More detailed example of net assets:
Sounds easy right?
Let’s look at actions to consider right away:
1. Work now to reformat the statement of financial position and statement of activities to eliminate temporarily restricted net assets and restricted net assets. Replace these terms with “net assets with donor restrictions” and “net assets without donor restrictions”.
Also review the financial statements and remove the terms “temporarily restricted” and permanently restricted net assets”. Replace these phrases with “net assets with donor restrictions” or “net assets without donor restrictions”.
2. Revise the statement of activities from the current four- column format to the new three- column format. Be sure to properly disclose the changes or updates in the following:
~ Net assets
~ Net assets with donor restrictions
~ Net assets without donor restrictions
To view all of our posts on the
Accounting Standards Update
You may still find a few confusing kinks in understanding these updated reporting standards. When your organization comes across perplexing information and you have questions--we are here with the answers. Don’t fret over understanding these new changes. We have the solutions and know-how to get it done for you. If you have any questions about ASU 2016-14 or any other not-for-profit industry topics, contact our not-for-profit team leader at trent@tbfosteraccounting.com.
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