Gary L. Krausz, CPA, CFF, is an audit and accounting services partner in the Los Angeles accounting firm, Gursey | Schneider LLP. Mr. Krausz works with many not-for-profit agencies and private foundations in Southern California. The firm’s website is http://www.gursey.com. Mr. Krausz offers the following guest post as an overview to help the not-for-profit community understand the major changes about to take place in accounting and financial reporting for not-for-profit organizations.
This past Thursday, August 18, 2016, the Financial Accounting Standards Board (FASB) approved the long-awaited first step in changes to the financial reporting model for not-for-profit organizations by releasing Accounting Standards Update No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities. These changes, when effective, will result significant reporting improvements for most not-for-profit organizations including our clients with such diverse operations such as (1) schools, (2) community agencies, (3) private foundations, (4) associations, and (5) religious organizations. The proposed changes will be effective for years beginning after 12/15/2017 (which means calendar years ending on 12/31/2018 and fiscal years ending during the calendar year 2019). Early adoption is permitted.
To highlight just a few of the improvements in Phase I of FASB’s plan:
- Functional expense disclosures will be required for all not-for-profit organizations (previously they were only required for a subset of organizations, those being voluntary health and welfare organizations). Therefore, all not-for-profit organizations will present both the natural account classification as well as the functional purposes. There are several options on how to adopt this presentation (on the face of the statement of activities, as a separate statement, or in the footnotes). This positive change will standardize expense reporting among all not-for-profit organizations. Additional report disclosures (such as discussing an organization’s allocation methodologies) around this topic will need to be added.
- Net asset classification – the new guidance will combine the current categories, “permanently restricted” and “temporarily restricted” net assets into one category, that being called “net assets with donor-imposed restriction.” The unrestricted net asset category will remain unchanged but will be renamed “net assets without donor-imposed restrictions.” This will simplify reporting of endowments and temporarily restricted gifts. For clients with “underwater” endowments (those where the market value of invested funds is less than the historical dollar value of the permanent gift), the presentation and disclosure will be supplemented.
- Investment expense presentation – for private foundations and other organizations with significant investment income, the investment returns will be presented net of external and direct internal expenses. This will improve comparability between those foundations and entities that manage their own investments versus those who hire external advisors.
- Cash flows statement – not-for-profit organizations will be given the option to present their operating cash flows in either the direct or indirect method without having to provide a reconciliation of the direct to the indirect method. Under current standards, if an organization elects to provide a direct method cash flows statement, they are also required to provide a reconciliation of cash flows from operations to the indirect method. This reconciliation requirement will no longer be applicable.
- Liquidity disclosures – The FASB will require not-for-profit organizations to provide enhanced liquidity disclosures (quantitative and qualitative) to convey to the readers information about the ability of the organization to meet its operating needs for the subsequent year. The purpose of this additional disclosure is to inform the reader about the nature of the organization’s assets and understand which assets are able to be converted to cash for operations in order to settle expenses and obligations coming due in the coming year.
These are the “first round” of FASB approved changes. Both the FASB and the American Institute of Certified Public Accountants published collateral materials on this topic. The FASB “In Focus” article expands in more detail some of the deliberative process and reasons behind the proposed changes of this new standard and provide some of the changes that may arise in future standards. The AICPA article is concise information you may share with others in your organization. We expect subsequent additional improvements and we will continue to keep you informed as changes arise.
Lastly, the FASB will be hosting a 1.5 hour webinar as continuing professional education on September 13 to discuss this matter further and host Q&A from the participants. We will participate and encourage all of our clients and other not-for-profit organizations to join the webinar. You are able to register for the FASB Webinar through their website.
Please feel free reach out to me if you have any questions about these financial reporting matters.