Upcoming Changes to Not-For-Profit Financial Statement Presentation

The Financial Accounting Standards Board (FASB) has issued a standards update that will make modifications to how certain items are presented in the financial statements for not-for-profit organizations, and also add a few new items to include in the financial statements.

The effective date for these new standards is for fiscal years beginning after December 15, 2017; so, for calendar year organizations that would mean your fiscal year ended December 31, 2018; for June fiscal year organizations it will be June 30, 2019. If you present comparative financial statements, the prior year (December 31, 2017 or June 30, 2018) will have to be modified to comply with the new standard.

The main changes are as follows.

Change in Presentation of Net Assets

FASB has reduced the complexity of the presentation of net assets. Instead of the requirement to present permanently restricted, temporarily restricted, and unrestricted net assets, as well as the total net assets, FASB has reduced the net asset classifications to two: Net Assets with Donor Restrictions and Net Assets without Donor Restrictions. Organizations with both donor restricted and non-donor restricted net assets will present amounts for these two classes in their statement of financial position, along with total net assets. If the organization only has one of the classes, that class and the total net assets should be presented, and the disclosure for net assets should note that the organization does not currently have any net assets in the other class.

In the statement of activities the organization has to present the changes in each of the two classes of net assets, as well as the change in total net assets for the period.

Require Presentation of Expenses by Function and by Natural Classification

All not-for-profit organizations will now have to show an analysis of expenses by both function (program, general and administration, and fund raising) and by natural classification (advertising, payroll, rent, etc.) in one location. An organization may either expand the statement of activities, include a statement of functional expenses, or include a disclosure that complies with this requirement.

The method used to allocate costs among program and support (general and administrative and fund raising) is required to be disclosed. 

Enhanced Disclosure Requirements

There are disclosures that the FASB has determined need enhanced. They are:

  • The amounts and purposes of governing board designated or appropriated funds that result in self-imposed limits on the use of resources without donor-imposed restrictions as of the end of the period. For example, a capital asset replacement fund or a rainy-day fund that the board establishes.
  • What makes up net assets with donor restrictions at the end of the period and how these restrictions affect the use of the resources. The organization can present a list of the donor-restricted balances, and include what the funds are to be used for in the future.
  • Qualitative and quantitative information about how the organization manages its liquid resources available to meet the cash needs for general expenditures within one year of the balance sheet date. This will include information that communicates the availability of cash or a financial asset that may be affected by its nature, external limits imposed by donors, grantors, laws, and contracts with others and internal limits imposed by the board.
  • Underwater endowment funds require the following enhanced disclosures:
    • The organization’s policy and any actions taken during the period concerning appropriation from an underwater endowment fund.
    • The aggregate fair value of those funds.
    • The aggregate gift amounts (or amount required by donor or law) to be maintained.
    • The aggregate amount by which the funds are underwater, which are to be classified as part of net assets with donor restrictions.

Presentation of Investment Returns Net of Expenses

 Investment returns will be presented net of external and direct internal investment expenses, and the amount of those expenses does not require disclosure.

Simplified Presentation of Long-Lived Assets Purchased with Donor-Restricted Funds

 Unless the donor provides explicit stipulations, the organization may use the placed-in-service approach to release net assets from restrictions related to the purchase of long-lived assets instead of releasing the restrictions as said assets are depreciated over their useful life.

Cash Flow Presentation

 The FASB removed the requirement to present the reconciliation of operating cash flows using the indirect method when presenting the direct method. Organizations may still continue to present their cash flow statement on either the direct or indirect method.

Future FASB Updates Related to Not-For-Profit Financial Statement Presentation

 The FASB initially released an exposure draft that contained many additional proposed changes; however, some were delayed to allow for coordination with other FASB projects. We will let you know about any future updates that may affect your organization.

Click on the following link for more details. If you have any questions, please contact our office.

FASB In Focus – Not-for-Profit Entities (Topic 958)