ASU 2016-14 – Part I: Five Areas of Not-for-Profit Financial Reporting That Will Be Impacted– July 17, 2018 by Marie Brilmyer

Issued in August 2016, Accounting Standards Update No. 2016-14 (ASU 2016-14) is intended to better enable nonprofit organizations to present their “financial story” and has been hailed as one of the most significant changes affecting not-for-profits in more than 20 years. The standard is effective for fiscal years beginning after December 15, 2017, which means calendar year-ends 2018 and fiscal year-ends 2019. This ASU affects ALL nonprofit organizations and addresses five key areas:

  1. Net asset classification,
  2. Investment income reporting,
  3. Expense presentation,
  4. Presentation of the statement of cash flows and
  5. Liquidity and availability of resources.

Below is a brief explanation of the impact to these areas.

1. Net Asset Classification

Organizations will be required to present net assets in two classifications: net assets with donor restrictions and net assets without donor restrictions. However, ASU 2016-14 still requires disclosure of the various types of donor restrictions.
 
In addition, ASU 2016-14 requires enhanced disclosures surrounding the changes and net asset classification of both underwater endowment funds and board designed net assets. The “underwater” amount of endowments, or the amount a donor-restricted fund has fallen below the original gift amount or the amount required to be maintained by the donor or by law, will now be classified as “with donor restrictions.” In addition, board designated net assets remain classified as “without donor restrictions” but will require additional disclosures your organization may not have previously included.
 
Finally, ASU 2016-14 eliminates the “over time” approach of releasing long-lived assets to net assets without donor restrictions. Instead, a placed-in-service approach must be used, absent explicit donor restrictions. This means the full gift amount will be reclassified from “with donor restrictions” to “without donor restrictions” when the acquired or constructed asset is placed in service.

2. Investment Income Reporting

Organizations must now report investment return net of external and direct internal investment expenses, whereas under current GAAP, this presentation is optional. The change will allow a better comparison of investment returns among all nonprofit organizations — regardless of whether their investments are managed internally, externally or if the organization uses mutual funds or other investment vehicles in which fees are embedded. Most organizations will not have direct internal expenses, which are generally incurred if you have a dedicated internal investment manager. In addition, disclosure of investment expenses and the components of investment return (investment income and realized/unrealized) are no longer required.

3. Expense Presentation

All organizations, not just voluntary health and welfare organizations, will need to report their expenses by natural classification according to the:

  • Kinds of economic benefits received in incurring those expenses, such as salaries and wages, professional services, and rent and utilities, and

  • Purpose for which the expenses were incurred, e.g., functional reasons, such as program services and supporting activities.

These can be presented either on the face of the statement of activities, a separate statement or in the footnotes. Additionally, you must disclose the method used to allocate costs between program and support services. Reporting as a supplemental schedule is no longer sufficient.

4. Presentation of the Statement of Cash Flows

ASU 2016-14 continues to allow organizations to use either the direct method or the indirect method to prepare its statement of cash flows. Current GAAP requires entities to present the indirect method reconciliation if the direct method is used. ASU 2016-14 removes this requirement. 

5. Liquidity and Availability of Resources

Perhaps the most significant change with ASU 2016-14 is the requirement for an organization to disclose qualitative and quantitative information surrounding its liquidity to give financial statement users a better understanding of how an organization manages its risks. Such information includes how a not-for-profit manages (qualitative) its liquid available resources to meet cash needs for general expenditures within one year, as well as the availability (quantitative) of financial assets at the balance sheet date to meet those same expenditures.
 
A simple way to meet many of these requirements is to present a classified statement of financial position. However, if your organization is more complex, the presentation will include the amount of financial assets at the end of each period, restrictions or limitations on financial assets such that they are not available for near-term cash needs, and the amount of financial liabilities that require cash in the near-term.
 

To prepare, read ASU 2016-14 and talk to your advisors about which specific issues will affect your organization’s financial statements the most. In addition, be aware that ASU 2016-14 was meant to be only Phase 1. Phase 2 may bring additional reporting changes surrounding operating measures and the statement of cash flows.

Read more in “ASU 2016-14 – Part II:  Implementation Strategies to Help Not-for-Profits Prepare.”

Read more about this update on the FASB website.

Please contact a member of your service team, or contact Marie Brilmyer at mbrilmyer@cohencpa.com for further discussion.

Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.