On August 18, the FASB issued awaited revisions to a standard that will revise the financial reporting for not-for-profit organizations. This is the first major revision in NFP financial reporting in more than 20 years and aims at addressing some of the complexity, inconsistency and transparency issues that many users have wanted to see addressed. According to the FASB chair, Russell Golden, “The new guidance simplifies and improves the face of the financial statements and enhances the disclosures in the notes – which will enable not-for-profits to better communicate their financial performance and condition to their stakeholders while also reducing certain costs and complexities in preparing their financial statements.”
The main provisions of the new standard include:
- Reduces the net asset classifications from three classifications to two: net assets with donor restrictions and net assets without donor restrictions (however, it will require increased disclosure about the types of restrictions on such assets).
- Requires NFP organizations to report expenses by function and nature either in a separate statement or in the footnotes to the financial statements
- Requires underwater donor restricted endowment funds to be reported in net assets with donor restrictions and enhances the disclosures about such underwater endowments
- Allows organizations to select between the direct method and indirect method for presenting operating cash flows (eliminates the requirement for organizations who use the direct method to perform a reconciliation with the indirect method)
- Requires a NFP organization to provide qualitative information in the footnotes of the financial statements about how the organization manages its liquid available resources and liquidity risks. Quantitative information that provides information regarding availability of a NFP's financial assets at the balance sheet date to meet cash needs for general expenditures within one year is required to be presented either on the face of the financial statement or in the footnotes.
The new standard will be effective for annual financial statements of fiscal years beginning after December 15, 2017 and early adoption is permitted.
Chad L. Milom, CPA, is an Audit Partner and Not-for-Profit Segment Leader at LBMC with over fifteen years of providing audit and advisory services to Not-For-Profit organizations. Chad works with a variety of not-for-profit clients, including religious organizations, independent private schools, higher education institutions, associations, foundations and social service organizations. In addition to providing audit and assurance services, including audits under OMB A-133, Chad’s experience includes consulting with not-for-profit organizations on internal control reviews and board governance.