That is how long it has been since the Financial Accounting Standards Board (FASB) last modified the accounting rules and disclosure requirements for non-profit entities, including churches, schools and 501(c)3 charitable entities. All this changed with the issuance of the FASBʼs Accounting Standards Update (ASU) 2016-14 Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities.
This ASU, which is effective for financial statements issued for fiscal years beginning after December 15, 2017, will require such entities to provide additional information about their resources and will change the current layout of their financial statements.
Currently, not-for-profit entities are required to present their net assets in three classes: unrestricted, temporarily restricted and permanently restricted. The new standard will simplify this to only two: net assets without donor restrictions and net assets with donor restrictions. Presentation will be on the face of the financial statements while reporting the amount of change in each class of net assets.
For any permanently restricted donations that have become “underwater”, these amounts are to be reported as net assets with donor restrictions, with expanded disclosures needed.
One big change will be the requirement to provide quantitative and qualitative information on how the entity manages its available resources and liquidity risks, including how they expect to meet their upcoming cash needs in the near term. This change will provide not-for-profit organizations the opportunity to share its strategy for managing their financial resources with its donor base, board members and other stakeholders.
The new standard also requires the reporting of expenses by function and nature in one location on the statement of activities or in the notes, and expanded disclosures regarding the methods used to allocate costs over program and support functions.
Non-profits will also be required to net external and direct internal investment expenses with the related investment returns presented on the statement of activities. This should allow for more comparability when analyzing one not-for-profit with another.
The last significant change impacts the statement of cash flows with the goal of increasing the understandability and usefulness of cash flows. Preparers of the cash flows statement will be allowed to choose between the direct method and indirect method of reporting, thereby eliminating the requirement for those choosing the direct method to perform a reconciliation with the indirect method.
The FASB believes these new requirements will make not-for-profit financial statements more useful to donors, grantors, creditors Like all major accounting and disclosure changes required by new FASB statements and ASUs, this change will require some additional time, effort and analysis to complete. It is recommended that most not-for-profit organizations begin now to understand the changes needed to implement this new standard.
If your not-for-profit entity needs assistance applying the new accounting standard, please call the team of experts at RJI International CPAs – 949-852-1600.
Gordon S. MacLean, CPA
Gordon is a Partner and the Director of Audit Services at RJI. He has over 30 years of experience, including 20 years at a Big 4 firm. He specializes in audits of publicly traded and privately held businesses in the not-for-profit, manufacturing, technology, medical device, real estate, hospitality, distribution, and professional services industries. Gordon can be reached at (949)852-1600 or at gmaclean@rjicpas.com.
About RJI International CPAs
Established in 1980, RJI specializes in audit, accounting, corporate and international tax issues for publicly traded and privately held companies. RJI is PCAOB registered and the Southern California member firm of DFK International, one of the largest accounting networks in the world.
