GAAP Reporting for Not-For-Profits is Changing

Not-for-profit (NFP) reporting has remained relatively constant over the past two decades. However, changes are finally coming. These changes are the result of Accounting Standards Update 2106-14 (also known as ASU 2016-14). The updates from this ASU are effective for fiscal years beginning after December 15, 2017. However, early adoption of the ASU is permitted. It is important to understand these changes and to begin to implement processes that effectively address the new reporting standards. Here are some of the goals that the changes are hoping to accomplish:

• To improve the usefulness of information provided to donors, grantors, creditors, and other users of a NFP’s financial statements.
• To reduce complexities or costs for preparers and users of financial statements.

The very real question to ask here is how does this really affect me? NFPs frequently have to answer to various stakeholders (donors, board members, banks, etc.) regarding the presentation and meaning behind the organization’s financial statements. In the past, the current presentation of the financial statements would sometimes leave more answer than questions. For example, how much cash is actually available to use now? How much are our investments earning? In addition to questions such as these, there could often times be inconsistencies with regard to how one organization presented a matter compared to another. The goal of the ASU is to simplify the presentation for both the user and preparer of the financial statements while simultaneously enhancing understanding.

Some of the more significant changes to GAAP reporting as a result of this ASU are:

• There are currently three net asset classes: unrestricted, temporarily restricted, and permanently restricted. The new ASU will now only have two classes: net assets with donor restrictions and net assets without donor restrictions.
  • The focus now becomes simply funds with restrictions vs. funds without. A key fact to most users of the financial statements and which is no longer clouded with the additional breakdown. With that said, enhanced disclosures around these two new classes will help provide needed color.
• NFPs can continue to report the Statement of Cash Flows using the direct or the indirect method. However, NFPs will no longer be required to report the indirect method if the direct method is chosen. This will allow the NFP to be able to distinguish which method would be best for the intended recipient of the financial statements.
  • Anyone that knows anything about cash flow preparation, knows that the indirect method can be difficult. This portion of the ASU is extremely significant as NFP’s are one of the first industries to allow the direct method without having to disclose the indirect method. No doubt some of your financial statement preparers are jumping up and down at this news!
• Enhanced financial statement footnote disclosures with regards to:
  • Board imposed restrictions will now be required to be a footnote disclosure if such restrictions exist.
    • Yes, funds may be unrestricted but having an appreciation for what amount of these funds are already earmarked for specific board designated activities can be very valuable to users of the financial statements. It speaks more clearly to the liquidity of unrestricted funds and the intent and or vision of the organization.
  • How the NFP manages liquidity to meet the demands for short-term demands for cash.
    • This will allow users to have a better appreciation, overall, as to what flexibility the organization has in adapting to an everchanging environment. The new disclosures will provide insight into to the strategy and overall liquidity goals of the organization. Which assets can really be used immediately to address current needs is important to many users.
  • The effects of methods chosen to allocate costs between program and support activities.
    • Enhanced disclosure as to how an organization allocates shared costs brings more attention and clarity to an inherently more risky area of the financial statements.
  • The ASU requires reporting of expenses by function and nature, as well as an analysis of expenses by both function and nature.
    • While a number of organizations may already report expenses by function and nature, this requirement will help ensure consistency between organizations and provide more detail for users. Appreciation for the allocation of dollars between salaries, occupancy, etc. can be useful to decision makers i.e. more information with regard to where the money goes. This analysis would provide more management insight to be portrayed on the financial statements.

While the above hits on some of the highpoints of the ASU, please refer to the ASU to appreciate all the nuances of the update. These changes are meant to provide better understandability for whomever the intended recipient of the financial statements may be. Again, the ASU brings more consistency and transparency to NFP financials by eliminating requirements that burdened the preparer and confused the user and replaces them with more useful information. As an organization, it’s important to understand these changes sooner rather than later to identify how the update will affect your organization and what new processes or modifications need to be addressed to ensure a smooth transition.

For more information about these changes and the other changes resulting from ASU 2016-14 please reach out to us at Meadows Urquhart Acree & Cook.