FASB Nonprofit Accounting: What You Need to Know

August 25, 2016

By Diana Miller

Following several years of examination and modification, the Financial Accounting Standards Board (FASB) released its long-awaited update this month on nonprofit financial reporting. The revision is expected to transform the way nonprofit organizations categorize net assets and construct financial statements.

To prepare, nonprofit organizations should familiarize themselves with the following developments:

Phase 1 (effective for fiscal years beginning after December 15, 2017) – Improvements to Presentations and Disclosures of NFP Financial Reporting- These enhancements are intended to tackle matters such as intricacy in net asset categorization, transparency in financial performance reporting, and utility of the statement of cash flows.

Net Asset Classifications. The three prevailing divisions of net assets: unrestricted, temporarily restricted, and permanently restricted, will blend to form two classes: net assets with and without donor restrictions.
Underwater Endowments. Accompanied by the changes to the categorization of net assets, underwater endowments will now be funneled in net assets with donor restrictions and additional disclosures will be required.
Board-Designated Net Assets. The amounts and purposes of these governing board-designations must be disclosed.
Liquidity Information. Additional disclosures providing information on an organization’s exposure to risks and availability of resources will be required.
Investment Return. On the front of the statement of activities, it will be mandatory for a net presentation of investment expenses against investment return.
Expenses. A breakdown of expenses by both nature and function will be a requirement for all nonprofit organizations–whether placed on the front of the statement of activities or in the footnotes. Additional cost allocation methodology disclosure is also mandatory.
Cash Flow Statement. Organizations can still choose to use the direct or indirect method. However, if the direct method is used, it is no longer mandatory to present the indirect method reconciliation.

Phase 2 – Coming soon… Enhancements to operating measures and alignment between the statement of activities and statement of cash flows.

Without question, these new regulations will momentously impact all nonprofit organizations and users of their financial statements. Early application is permitted, amendments should be applied retroactively in the year the update is first applied and nonprofit organizations should disclose the nature/impact of any reclassifications or restatements. To examine the full standard, visit their website: https://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1176156316498

Diana Miller has over 18 years of experience in public accounting, serving a plethora of clients in not-for-profit, higher-education, government and commercial organizations, performing audits, reviews, compilations, tax and consulting services.