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Not-For-Profits: Get Ready for Historic Changes to Accounting Principles

For not-for-profit organizations (NFPs) that follow generally accepted accounting principles (GAAP) the biggest changes in more than 20 years are about to hit. The good news: All NFPs will follow uniform standards designed to enable anyone to read and compare their financial statements.

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-14 in August 2016 to amend its code for NFPs. The enhancements apply to NFPs that follow GAAP reporting and must be used in financial statements for fiscal years beginning after December 15, 2017, and for interim periods within fiscal years beginning after December 15, 2018.

NFPs should pay particular attention to the new disclosure requirements. These include changes to the way NFPs report net asset classification and investment return, liquidity disclosure, expense presentation, and cash flow reporting. While some of the requirements may simplify NFP accounting, the goal is to provide greater transparency in NFP financial statements.

For example, the FASB has simplified net asset classification by requiring NFPs to record two classes of net assets instead of three: net assets with donor restrictions and net assets without donor restrictions. However, NFPs must still provide information about the nature and amounts of different types of donor-imposed restrictions, as well as information about the way the governing board chooses to spend, or not spend, donations.

In an effort to make it easier to compare expense reporting year over year, NFPs will be required to provide information about both the nature and function of their operating expenses as well as enhanced disclosures about the method they use to allocate expenses. NFPs will also be required to disclose information about both the availability of their liquid resources and how they meet their cash needs for general expenditures incurred within one year of the balance sheet date.

While NFPs can continue to follow either the direct or indirect method when they report cash flows, the FASB wants to encourage NFPs to use the direct method. To encourage more organizations to make the switch, the FASB no longer requires the reconciliation to indirect method if the direct method is used.  The FASB, however, has continued to allow NFPs to provide cash flow statements using the indirect method of reporting.

The new requirements represent the beginning of a two-phased effort to make NFP financial statements more useful to donors, grantors, and creditors.

“The FASB wants to make it easier to understand the financial health of NFPs,” says Naomi Porter, Senior Manager at Kelly CPA. “We encourage all NFPs to educate their board members about the enhancements and the additional reporting requirements.”

Is your organization ready? Kelly CPA can walk you through the new requirements to ensure that your next financial statement complies with ASU No. 2016-14. Contact us at 469.857.0011 or [email protected] to get started.