Financial Reporting Changes
Financial reporting requirements for not-for-profit organizations have been updated to improve usefulness of financial statements to donors, grantors, creditors, and other users of financial statements. In August 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-14, Presentation of Financial Statements of Not-for-Profit Entities, intended to benefit financial statement users by making assessment of organizational liquidity, financial performance, and ability to continue providing service easier to interpret. Ultimately, nonprofit financial statements are expected to better indicate the immediate financial status of the reporting organization. Amendment changes become effective for financial statements issued during fiscal years beginning after Dec. 15, 2017, and for interim periods within fiscal years beginning after Dec. 15, 2018. Organizations whose fiscal years end in June will not be affected by the new requirements until they prepare their financial reports for the fiscal year ending June 2019.
The changes require nonprofit organizations to provide enhanced qualitative and quantitative disclosures of what their assets are and how they are to be used. Footnotes will be required to convey qualitative information on the liquidity of available resources within the 12 months following the balance sheet date. Required quantitative disclosures will need to communicate the availability of a nonprofit’s financial assets to meet the cash needs of the reporting organization within one year. Liquidity and availability of resources disclosures must identify the assets that have restrictions.
The changes will require upcoming financial statements to reduce net asset classes from three to two. Prior financial statements classified net assets as unrestricted, temporarily restricted, and permanently restricted. Financial statements with fiscal years beginning after Dec. 15, 2017 will have two net asset classes: one for net assets without donor restrictions, and another for net assets with donor restrictions. Net assets with donor restrictions also require further disclosure of the composition of net assets with donor restrictions and how those assets can be used. Amounts and purposes of board-designated assets must also be included in net assets with donor restrictions financial disclosures.
To avoid unnecessary confusion and reporting inconsistencies, nonprofit statements of cash flow will no longer require the presentation or disclosure of the indirect method (reconciliation) if using the direct method. FASB rules will also no longer require nonprofit organizations to include detailed disclosures on net investment returns. Furthermore, the new rules will soon require nonprofit entities to report underwater endowments with additional disclosures and as net assets with restrictions.
Members should also be aware that the recent tax reform legislation (Public Law 115-97) amended rules for unrelated business taxable income. Any organization with more than one unrelated trade or business must separately compute unrelated business taxable income for each trade or business entity. Unrelated business taxable income rule changes become effective for all tax years beginning after Dec. 31, 2017. Again, this rule does not apply to organizations operating in a fiscal year beginning July 2017 and ending June 2018.
The entire FASB accounting standards update (No. 2016-14) is available here. The accounting/tax/advisory firm BST provided a seminar titled "New Financial Reporting Rules for Nonprofit Organizations" on June 14th. The BST seminar focused on ASU 2016-14’s impact on financial statements, form 990 changes, and the tax reform legislation’s effect on not-for-profit organizations. Please note that the LeadingAge NY Financial Professionals Conference at the end of August will feature sessions on both the FASB change and implications of the tax legislation.
Contact: Ken Allison, kallison@leadingageny.org, 518-867-8820