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The New NFP Financial Reporting Standard ASU 2016-14: The Top 5 Things Your Board Should Know!

The ASU 2016-14 was recently modified to update the current model. The changes improve information in financial statements and notes and allows NFP organizations to better tell their story. This applies to all NFPs and is effective for annual financial statements issued for fiscal years beginning after December 15, 2017.

WARNING: This blog contains intense, technical information. It is advised that you consult your CPA or our not-for-profit leaders for clarification.

5 Key Changes to NFP Financial Statements

  1.  Net Asset Classes
  • “Underwater” endowments: revised net asset classification that is reflected in net assets with donor restrictions rather than in net assets without donor restrictions.
    • Enhanced disclosure requirements:
      • NFP endowment policy and any changes during the period
      • Aggregate fair value of endowed fund
      • Aggregate amount of original gifts
      • Aggregate amount by which funds are underwater
  • New requirement that all NFPs provide disclosures about:
    • Amounts and purposes of governing board designations
    • Appropriations and similar actions that result in self-imposed limits on the use of resources
    • Internal limits imposed by actions of the governing board
    • Can be made by management with board authority to do so
    • No requirement to have board designated net assets
  1.  Investment Return
  • Required to report all external and direct internal investment expenses netted against investment return on the statement of activities
    • External – amounts paid to third parties to generate investment returns
    • Direct internal – direct conduct or supervision of strategic and tactical activities to generate investment returns such as:
      • Salaries and related costs for those responsible for the development and execution of investment strategy
      • Costs associated with supervising, selecting, and monitoring external investment management firms
  • Eliminated the requirement to disclose:
    • Composition of investment return
    • Amount of investment expenses
  • Endowment fund disclosure roll-forward only required to present net investment return
  1.  Expense Reporting
  • The new standard requires all NFPs to report expenses by both functional and natural classification. Presentation should include all expenses including those netted with revenues on the statement of activities (investment expenses are excluded).
    • Option 1: Present a statement of functional expenses along with other financial statements (before the footnotes)
    • Option 2: Present as a footnote disclosure
    • Option 3: Present functional categories of expenses disaggregated by natural category on the statement of activities
  • NFPs are required to provide a qualitative description of the methods used to allocate expenses
  • Improved guidance about management and general expenses
    • Activities that represent direct conduct or direct supervision of program or other supporting activities require allocation from management and general activities
  1.  Statement of Cash Flows
  • Continue to allow freedom to choose between the direct method and the indirect method in presenting cash flows from operating activities. However, the new rules eliminate the requirement to present an indirect reconciliation if the direct method is presented.
  1.  Liquidity and Availability
  • Availability of financial assets disclosures:
    • Quantitative indicates it will primarily be about numbers and balances.
    • Focus on financial assets which are defined by U.S. GAAP as cash, contracts to receive cash (receivables, debt securities), and evidence of equity ownership in another entity (equity securities).
    • No definition of “general expenditures.”
    • Can be presented on the face of the financial statements or in the notes.
  • Limits on availability of financial assets:
    • Availability of financial assets may be affected by:
      • Their nature
      • External limits imposed by donors, laws, and contracts with others
      • Internal limit imposed by governing board decisions
  • Flexibility and options:
    • Can present disclosure in two separate footnotes or combine into one

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 aharrell@thf-cpa.com.

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