Significant accounting changes are coming for nonprofit organizations under the theme of simplifying the face of the financial statements together with enhancing the footnote disclosures. Three things you should know include: (1) net assets classifications are reduced from three to two; (2) significant new footnote disclosures will be required; and, (3) several improvements are made to financial statement presentation. The FASB issued accounting standards update (ASU) 2016-14 which is effective for years ending in 2018 although earlier adoption is allowed. The ASU makes significant changes to the FASB accounting topic related to nonprofit entities (Topic 958). Instead of three classes of net assets (unrestricted, temporarily restricted and permanently restricted) the ASU requires two classes based on whether donor restrictions exist. The two classes are “with donor restrictions” and “without donor restrictions”. The ASU heads in the direction of international reporting standards (IFRS) by requiring many new and enhanced disclosures. The disclosures will include useful information about the nature, amounts and effects of various donor-imposed restrictions. The goal is to help readers of the financial statements better understand the following aspects of the nonprofit organization: (a) the availability of resources to meet general expenditure needs for the ensuing year; (b) liquidity of financial flexibility; (c) service efforts and ability to continue providing services; and, (d) management’s performance and stewardship responsibilities. Disclosure requirements include: cost allocation methodologies, self-imposed restrictions such as board designated endowments, and how the organization manages and accounts for “underwater endowments”. The ASU no longer requires the nonprofit organization to present or disclose cash flows using the indirect method if the direct method is chosen. Reporting investment returns is simplified. Investment expenses will be netted against investment returns and reported in the net asset category in which the net return is reported. Realized and unrealized amounts will be included in net investment return. Expense reporting by both their natural classification and their functional classification is required in one location, either the statement of activities, a separate statement, or the notes to the financial statements. Prepare for implementation by reviewing the required changes and identifying changes your organization needs to make. You may need to formalize policies around cost allocation, endowment operation, and donor restrictions. The ASU provides several good footnote examples that could be repurposed as your accounting policy. Stay ahead of the curve and consider implementing the new guidance before it is required.
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