The Financial Accounting Standards Board (FASB) has issued “Not-for-Profit Entities (Topic 958) and Health Care Entities (Topic 954).” This is the biggest change to Not-for-Profit (NFP) reporting since 1993. The changes will provide the users of the financial statements with better information about the financial health of an NFP. This standard will affect net asset classifications, liquidity, and financial performance.
Ultimately, the aim of these changes is to improve the usefulness and reduce the complexity of the financial information presented to users of the financial statements.
The FASB decided this standard would be effective for financial statements for fiscal years beginning after December 15, 2017. Early adoption is also permitted.
While we communicated the proposed changes in a previous letter, we wanted to remind people of the changes that will be put in place now that they have been approved by FASB.
The following is a summary:
- Reporting net assets according to two classes rather than three classes. These new classes will be net assets with donor restrictions and net assets without donor restrictions. The unrestricted, temporarily restricted, and permanently restricted classes would be eliminated. The NFP would be required to report the change in the two net assets classes as well.
- Disclosing additional information about board-designated net assets, donor restrictions, solvency, cost allocation methods, and underwater endowment funds in the footnotes to the financial statements.
- Removing the requirement for voluntary health and welfare organizations to provide a statement of functional expense in the financial statements. Such information could be reported on the statement of activities, statement of functional expense, or the footnotes.
- Removing the option to release contributions restricted for capital expenditures over the useful life of the asset. All restrictions for such contributions must be released using the placed-in-service method.
- Netting investment expenses (external and internal) against investment return on the statement of activities. This removes the current requirement for disclosing any investment expenses netted against investment return.
- Continue to present on the statement of cash flows the net operating cash flows using either the direct or indirect method of reporting nut no longer require the presentation or disclosure of the indirect method (reconciliation) if using the direct method.
The FASB decided that NFPs should apply the change on a retrospective basis for all years presented. However, if presenting comparative financial statements, NFPs would have the option to omit the analysis of expenses by both functional and natural classification. Also, NFPs would have the option to omit the disclosures around liquidity and availability of resources for any years presented before the year of adoption.