By Jennifer DeBor, CPA
June 30 didn’t only mark the end of the first half of 2019. It was also the first day for significant updates to the standards used in drafting financial statements for not-for-profit (NFP) entities that have a 6/30 year end.
These updates make changes to net asset classification requirements and include enhanced disclosures on a host of financial information and qualitative information. We’ve been expecting and preparing for these changes, as the FASB announced them in 2016. Now that they’re a reality, it’s time for a refresher for all NFP postsecondary institutions and other NFPs that will be affected.
What is the purpose of these updates?
With these updates, the FASB’s Not-For-Profit Advisory Committee (NAC) is aiming to improve financial statements for NFPs by simplifying certain aspects, making them easier to understand and compare over different periods for donors, grantors, creditors and other stakeholders looking to identify trends. Meanwhile, the enhanced disclosures are meant to provide those stakeholders with more information on an NFP’s liquidity, financial performance and cash flows.
The updates were devised as the first part of a two-phase project intended to make financial statements more useful and address identified issues in current financial reporting. The second phase is expected to address more protracted issues, according to the FASB.
What do the updates entail?
1. Among the most important changes, NFPs will now only have to present two classes of net assets, instead of three, as well as report the amount of the change in the two classes on the face of the statement of activities. The new required classifications are “net assets with donor restrictions” and “net assets without donor restrictions. Total net assets should continue to be reported.
There had been confusion over the previous classifications, which were broken down into “unrestricted net assets,” “temporarily restricted net assets” and “permanently restricted net assets.” Now, the latter two are combined into one class.
2. The following enhanced disclosures are required:
- The amounts and purposes of board designations resulting in self-imposed restrictions.
- The composition of donor-restricted net assets and how they affect the use of resources.
- Qualitative or quantitative information in the statement of financial performance (or as a separate statement or in the footnotes) to disclose how the NFP manages its liquid resources and will meet cash needs within the next year.
- Expenses presented by both natural classification (GL accounts) and function classification (type of service).
- The methods the NFP uses to allocate assets among program and support services.
- Underwater endowment funds, including the NFP’s policy (and actions taken during the period) concerning appropriation from those funds, aggregate value of such funds, aggregate of the original gift amounts (or level required by donor or law) to be maintained and the aggregate amount by which the funds are underwater.
3. NFPs must report the net investment returns of both external and direct internal investment expenses, but they are no longer required to disclose the gross investment income and expense.
4. In the absence of explicit donor stipulations, NFPs must use the placed-in-service approach for the expirations of restrictions to acquire or construct a long-lived asset.
What to do now?
The updates are effective for fiscal years beginning after Dec. 15, 2017, and interim years beginning after Dec. 15, 2018. Also, their application to interim financial statements is permitted but not required in the initial year of application.
Notably, NFPs this year have the option to omit two pieces of information for comparative years presented:
- Analysis of expenses by nature and function.
- Disclosures around liquidity and availability of resources.
For NFP institutions looking for more guidance on these new updates and updates on preparing their financial statements, the professionals at McClintock & Associates are here to help. Please reach out with any questions or to schedule a consultation.