Nonprofit Financial Statements: FASB Update

Are your nonprofit financial statements in order for this coming fiscal year? Due to FASB’s new reporting requirements, now is great time to reevaluate the quality and compliance of your organization’s financial statements.

New FASB Requirements in 2018:

Is This a Concern for Your Nonprofit Financial Statements?

Your nonprofit organization may not prepared for the new FASB reporting requirements. These changes will impact all nonprofit financial statements with the goal of providing more useful information to stakeholders. Thus, FASB ASU 2018-14 is the first of a two-phase project intended to strengthen clarity, transparency, and consistency in nonprofit financial statement reporting.

The year your organization follows impacts the time frame for compliance with the new report format. Changes in this update are effective for annual financial statements issued for fiscal years:

• Beginning after December 15, 2017
• Interim periods within fiscal years beginning after December 15, 2018

New in Net Assets

Nonprofit organizations currently utilize three classes of net assets:  unrestricted, temporarily restricted, and permanently restricted. These will now become two classes:

1. Net assets with donor restrictions
2. Net assets without donor restrictions

As a result, footnote disclosures will be required to include the timing and nature of the restrictions. Further, FASB now requires the composition of net assets with donor restrictions at the end of the period.

More Than Just Nonprofit Financial Statements

These reporting changes are particularly important, as they affect more than just your nonprofit financial statements. More than reporting, FASB now imposes documenting and handling requirements. Specifically, this update changes how underwater endowments are handled. Under the new guidelines, these assets (valued at less than the time of the original gift) will now be classified as “net assets with donor restrictions”. Further, board-designated net assets now require disclosure of amounts and purposes on relevant nonprofit financial statements.

Currently, nonprofits may recognize the expiration of a donor restriction over time, but under new guidelines, they will need to reclassify net assets with donor restrictions. Pointedly, these restrictions are used to acquire or construct long-lived assets as “net assets without donor restrictions” when the asset is placed in service.

Changes to Statement of Cash Flows

Previously, organizations were required to provide an indirect reconciliation when using the direct method on SCF on nonprofit financial statements. With the new guidelines, nonprofit organizations are able to select the presentation method that best serves the entity. No reconciliation required!

Alteration to Statement of Activities

With the new FASB guidelines, nonprofits will need to present the amount of change in each of the two new classes of net assets. In addition to this, they will also need to present two subtotals of operating activities that each correspond with changes in net assets without donor restrictions. Regarding operating expenses, organizations must now report both nature and function. They must also enhance disclosures to include methods of allocating costs among the different functions. Additionally, the update requires a “net presentation” of investment expenses against investment on relevant nonprofit financial statements.

Other Changes to Your Nonprofit Financial Statements

The update will also demand additional qualitative and quantitative information. Namely, this concerns information on the face of the balance sheet or in the notes to report on spendable financial resources.

In Short

This most recent FASB update will impact your nonprofit financial statements. The real question is when and to what extent. In short, your organization needs to look out for changes to how it reports net assets. Consequently, this will change how donations are internally documented as well. Finally, there’s a knock-on effect to your organization’s statement of activities. The scope of this update is more or less limited to those three areas, so if you get up to code there, you’ll be in pretty good shape for FASB compliance. As a bonus, your organization now might be able to take advantage of a new method for reporting operating cash flows. This isn’t a required change, but your nonprofit financial statements might be sub-optimal as is. Now is a great time to take a look at your ledger and see what can be improved.

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