Editor’s Note: This article was originally published in 2018 following the adoption of ASU 2016-14. It has been updated to reflect the financial reporting, disclosure, and audit considerations that continue to be relevant for not-for-profit healthcare organizations.
For finance leaders, these requirements affect more than financial statement presentation. They also influence the supporting schedules, accounting records, disclosures, and documentation organizations need to maintain for their year-end financial statement audit.
These presentation and disclosure requirements affect the information organizations need to maintain throughout the year and provide during the financial statement audit. Experienced audit and assurance services can help healthcare organizations evaluate financial reporting requirements, prepare supporting documentation, and address reporting issues before they disrupt the audit process.
Improved Transparency of an Entity’s Net Assets and Liquid Resources
Prior to ASU 2016-14, concerns existed regarding the complexity of classifying net assets among three separate categories. ASU 2016-14 simplified these classifications, and the following requirements continue to improve transparency surrounding net assets and an organization’s available resources.
- The currently defined categories of net assets include: temporarily restricted, permanently restricted, and unrestricted net assets. These categories will be reduced and simplified to only two categories – net assets with donor restrictions and net assets without donor restrictions.
- The common classification of “assets limited as to use” must now clearly distinguish between internally designated funds or externally restricted funds. This clarification can be accomplished through separate line items on the balance sheet or disclosed within the notes to the financial statements.
- Any amounts of cash and cash equivalents that are (1) restricted as to withdrawal or use for other than current operations, (2) designated for use of acquisition or construction of noncurrent assets, (3) required to be segregated for liquidation of long-term debts, or (4) limited to use for long-term purposes by a donor-imposed restriction should be reported separately on the face of the financial statements and excluded from classification as current assets.
Increased Disclosures Regarding Liquid Resources and Functional Expenses
ASU 2016-14 requires enhanced disclosures for all not-for-profit entities, including not-for-profit healthcare organizations. Required disclosures include qualitative and quantitative information to inform readers of the healthcare entity’s available liquid resources and communicate how the entity manages those liquid resources to meet general cash needs within one year from the date of the financial statements. The disclosures should address any limitations on the available resources due to the nature of the asset or internal or external restrictions imposed by donors, grantors, laws, contracts or governing boards. For any internally or externally restricted assets expected to be used to meet cash needs for the following year, disclosures should include justification as to their availability given the restrictions.
The improved disclosures should also include a more detailed presentation of amounts of expenses by both their nature and function. Many healthcare not-for-profit organizations historically disclosed expenses by functional category within the financial statement footnotes. ASU No. 2016-14 requires organizations to present both the natural and functional classification of expenses in one location. This requirement can be met through the face of the financial statements, a separate statement, or in the footnote disclosures. Additionally, any expenses attributable to more than one program or support function, an allocation across the programs or supporting activities will be required. When applicable, the method used to allocate the expenses across the program and support functions should also be disclosed. Below is an example disclosure designed to meet the new requirements, which was obtained from the AICPA’s “Exploring FASB’s Not-for-Profit Financial Reporting Standard: ASU 2016-14, Supplemental Health Care Disclosure Examples: Natural and Functional Class Presentation.”
Elimination of Cash Flow Indirect Method Reconciliation
ASU No. 2016-14 also changed the requirements for the presentation of cash flows. Current guidance requires a not-for-profit entity to present a reconciliation of operating cash flows using the indirect method of reporting when a direct method cash flow is presented in the financial statements. Under this standard, organizations that prepare the statement of cash flows using the direct method are no longer required to present an indirect-method reconciliation.
Although ASU 2016-14 is no longer a newly adopted standard, its presentation and disclosure requirements remain an important consideration for healthcare not-for-profit organizations. Organizations should periodically evaluate their financial reporting processes, liquidity disclosures, expense allocation methodologies, and supporting documentation to help ensure compliance and support an efficient financial statement audit.
Financial reporting requirements are only one component of year-end readiness for not-for-profit organizations. Management teams can use this nonprofit financial statement audit checklist to identify additional documentation, accounting, and financial reporting items to address before fieldwork begins.
Healthcare organizations should ensure their accounting systems and reporting processes can produce accurate information supporting required financial statement disclosures. Maintaining audit-ready documentation throughout the year can help reduce reporting challenges, improve transparency, and streamline the year-end audit process.
This preparation should happen well before year-end so management has time to resolve reporting gaps, reconcile supporting schedules, and address documentation issues. Organizations can also review how to prepare for a financial statement audit to reduce year-end surprises and improve audit readiness.
For more information or to see if these changes will impact you, contact us.
Content provided by LBMC audit professional, Laura McGregor.
