The primary purpose of the update is to improve information regarding liquidity, financial performance and cash flows in the financial statements. Reduced complexity, increased transparency, and consistency in information and presentation will benefit users of the financial statements.
The major changes affect the following:
- Net asset classes
- Investment return
- Liquidity and availability of resources
- Presentation of operating cash flows
Net Asset Classes
This ASU reduces the number of net asset classifications from three (donor restricted, temporarily restricted, permanently restricted) to two (net assets with donor restrictions and net assets without donor restrictions).
For gifts of cash or other assets with restrictions to be used to acquire or construct capital assets, the current option to release the donor-imposed restriction over the estimated useful life of the acquired asset is eliminated. In the absence of explicit donor stipulations, the placed-in-service approach must be used.
Disclosure of the nature and amounts of donor restrictions is still required, along with a new requirement to disclose board designations on net assets without donor restrictions.
Investment return will now be a required disclosure and will be reported net of external and direct internal investment expenses, and those netted expenses will no longer require disclosure. This will provide a more comparable measure of investment return, regardless of whether investments are managed internally or externally.
Under current standards, 501(c)(3)’s report natural and functional expenses in a statement of functional expenses. Under the new requirements, all nonprofits must report expenses by both function and nature (i.e., salaries, advertising, depreciation, etc.), either on the face of the statement of activities, as a separate statement of functional expenses, or in the notes to the financial statements. Additionally, the methods used to allocate costs among program and support functions must be disclosed.
Liquidity and Availability of Resources
Communication, both qualitative and quantitative, of the NFP’s ability to meet cash needs for general expenditures within one year of the balance sheet date will be required. This may include disclosure of internal policies related to minimum cash balances, lines of credit available, and other specific management plans to meet cash needs, so that the reader will now be able to more easily assess the organization’s liquidity and available financial resources to meet cash needs.
Presentation of Operating Cash Flows
Entities continue to have the option of presenting the statement of cash flows using either the direct or indirect method. The indirect method requires a reconciliation of changes in net assets to cash provided by (used in).
While this ASU is effective for fiscal years beginning after December 15, 2017, early implementation is permitted.
If comparative financial statements are presented, NFPs have the option to omit certain disclosures for any periods presented prior to adoption. In the adoption period, disclosure is required for the nature and effects on changes in the net asset classes for any reclassifications or restatements of prior periods.
Get Started Now
It’s always better to get started sooner rather than later. For example, if you haven’t isolated internal investment costs in the past, create new accounts to keep track of such costs in order to take advantage of the changes allowed under the new standards.
If you haven’t prepared a statement of functional expenses in the past, review the guidelines and decide whether you will incorporate the details into your current statement of activities or whether to add a new statement of functional expenses to your current financial reporting package.
Review your current accounting policies to determine if you have information to present the liquidity disclosures. If not, start to develop those policies needed.
Although preparing a cash flow statement under the direct method removes the reconciliation requirements for the operating activities, would it be too cumbersome and less useful to your stakeholders? If so, you should make a formal decision to stay with the indirect method of presentation.
We recommend starting the process now. Take a look at your current financial statement presentation and prepare the statements under the new guidelines. You may discover that you need to make some changes to your financial reporting systems to accommodate the changes after all.
Jacob Azar, CPA, joined Lindquist in 2014 as the Director of Not-for-Profit Practice Services. Jay is based in Lindquist’s Orange, California office. He is considered an expert in not-for-profit accounting and has chaired/led many accounting technical teams over the years. Jay has extensive experience with public/private foundations, private higher education organizations, healthcare entities, religious organizations and membership organizations. He is a member of the American Institute of Certified Public Accountants (AICPA), the California Society of Certified Public Accountants (CalCPA), and the California Society of Association Executives (CalSAE). Jay holds a Bachelor of Science in Business Administration from the University of Rhode Island. Contact him at email@example.com or (714) 257-0100 with questions.
Tamara Graham, CPA, joined Lindquist in 2017 as a manager in Lindquist's Portland office. Tamara has more than 18 years of audit experience, including nine years of experience providing audit and accounting services to not-for-profit entities. Tamara is a member of the AICPA and Oregon Society of Certified Public Accountants (OSCPA), a Certified Fraud Examiner part of the Association of Certified Fraud Examiners (ACFE), and Certified Internal Auditor part of the Institute of Internal Auditors (IIA). She has earned the Not-for-Profit Certificate II from the AICPA and serves on the Not-for-Profit Committee of the OSCPA. Tamara earned a Bachelor of Business Administration, Accounting from Southern Oregon University. Contact her at firstname.lastname@example.org or (971) 532-6300 with questions.