New Accounting Standards for Not-for-Profit Entities Impacts Financial Statement Reporting

As you may have heard, a new accounting standard related to not-for-profit entities was issued and is effective for annual financial statements issued for fiscal years beginning after December 15, 2017. The standard, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements for Not-for-Profit Entities (ASU 2016-14), was issued to simplify and improve the current net asset classification requirements and the information presented in financial statements and notes about a not-for-profit entity’s liquidity, financial performance and cash flows.

A summary of changes you will notice in the December 31, 2018 and subsequent financial statements of not-for-profit entities you are involved with or donate to follows:

1. The statement of financial position will show two classes of net assets (net assets with donor restrictions and net assets without donor restrictions) rather than the three classes that were previously required (unrestricted, temporarily restricted and permanently restricted).
2. The statement of activities will show the changes in the two classes of net assets rather than the three classes that were previously required.
3. The statement of cash flows from operating activities can be shown using either the direct or indirect method and will no longer require that the indirect method be presented or disclosed if the direct method is chosen.
   1. The direct method of cash flow presentation begins with gross cash receipts and deducts gross cash payments for operating costs and expenses, individually listing the cash effects of each major type of operations activity. The indirect method of cash flow presentation starts with net income and adjusts for (a) noncash items such as depreciation and deferred income taxes and (b) changes during the period in operating current assets and liabilities.
4. The disclosures will be enhanced to disclose the:
   1. Amounts and purposes of governing board designations, appropriations and similar actions that result in self-imposed limits on the use of resources without donor-imposed restrictions as of the end of the period.
   2. Composition of net assets with donor restrictions at the end of the period and how the restrictions affect the use of resources.
   3. Qualitative information that communicates how a not-for-profit manages its liquid resources available to meet cash needs for general expenditures within one year of the balance sheet date (presenting a classified statement of financial position).
   4. Quantitative information, either on the face of the statement of financial position or in the notes that communicates the availability of a financial asset which may be affected by (1) its nature, (2) external limits imposed by donors, grantors, laws and contracts with others, and (3) internal limits imposed by governing board decisions.
   5. Amounts of expenses by both their natural classification and their functional classification. That analysis of expenses is to be provided in one location, which could be on the face of the statement of activities, as a separate statement or in notes to financial statements.
   6. Method(s) used to allocate costs among program and support functions.
   7. Underwater endowment funds, which include required disclosures of (1) a not-for-profit’s policy, and any actions taken during the period, concerning appropriation from underwater endowment funds, (2) the aggregate fair value of such funds, (3) the aggregate of the original gift amounts (or level required by donor or law) to be maintained, and (4) the aggregate amount by which funds are underwater (deficiencies), which are to be classified as part of net assets with donor restrictions.
5. Report investment return net of external and direct internal investment expenses and no longer require disclosure of those netted expenses.
6. In the absence of explicit donor stipulations, use the placed-in-service approach for reporting expirations of restrictions on gifts of cash or other assets to be used to acquire or construct a long-lived asset and reclassify any amounts from net assets with donor restrictions to net assets without donor restrictions for such long-lived assets that have been placed in service as of the beginning of the period of adoption (thus eliminating the current option to release the donor-imposed restriction over the estimated useful life of the acquired asset).

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ABOUT THE AUTHOR

Tim Lens, CPA

Tim is a director who plans, coordinates and supervises assurance engagements and meets with clients to review their financial reports.  He works diligently to keep communication lines open with clients and that engagements are performed in a timely and efficient manner. Tim’s specialty areas include government, nonprofit and construction.

Tim has a bachelor’s degree from Midland University, serves on the State & Local Government Accounting & Auditing committee for the Nebraska Society of CPAs and is a member of the American Institute of Certified Public Accountants. Tim serves on the board of the Omaha Running Club and is the race director for the Lake Wehrspann Run. In addition to running, Tim also enjoys golfing, hiking, biking and volunteering.