David A. DiIulis
Principal, CPA, CGFM

25 May 2017

It’s been over twenty years since Financial Accounting
Standard (“FASB”) 117, Financial Statements of
Not-for-Profit Organizations was adopted. At the time,
FASB redefined the manner in which not-for-profit entities produced their financial statements in order to remain in compliance with generally accepted accounting
principles. Although the FASB thought the current financial presentation model was sound, the FASB felt that improvements were necessary to provide more useful
information to donors, grantors, creditors and other users of the financial statements. As a result, Accounting Standards Update 2016-4, Not-for-Profit Entities, Topic 958 was issued in August 2016. This particular update represents phase one; with the FASB anticipating to issue a phase two update that will incorporate additional changes in the near future.

A few of the key provisions of the update require a not-for-profit entity to:

  • Change the presentation of net assets on the statement of financial position from three categories to the following two categories: net assets with donor restrictions and net assets without donor restrictions.
  • Change the presentation on the face of the statement of activities from reporting the changes in three classes of net assets to two classes of net assets.
  • Net external and direct internal investment expenses against investment return and no longer require the disclosure of those netted expenses.
  • Use the placed-in-service treatment for reporting expiration of restrictions on gifts, in the absence of explicit donor restrictions, to acquire or construct a long-lived asset rather than releasing the restrictions over the life of the specific asset. Additionally, reclassify those amounts at the beginning of the period of adoption from net assets with donor restrictions to net assets without restrictions.
  • The amounts of the expenses by their natural and functional classification need to be disclosed in one single location: either on the face of the statement of activities, as a separate statement, or in the notes to the financial statements.
  • Disclose the methodology utilized to allocate expenses between program and support functions.
  • Classify underwater endowments as a reduction of net assets with donor restrictions. Additional disclosures that are required include the aggregate amounts underwater, the aggregate original gift amounts, the fair value of such funds and the organizational policy to spend from such funds are required.
  • Disclose qualitative information that communicates how the respective not-for-profit entity manages its liquid resources available to meet cash needs for general expenditures within one year of the balance sheet date.
  • Disclose all quantitative information either on the face of the balance sheet or in the footnote disclosures.  The availability of financial assets at the balance sheet date must meet cash needs for general expenditures within one year of the balance sheet date. Availability of resources may be affected by their nature including external limits imposed by donors, grantors, laws, and contracts as well as internal limits imposed by governing board decisions.

“The FASB believes that the update will improve the usefulness of information provided to donors, grantors and other users of the NFP’s financial statements
as well as reduce the complexities or costs for preparers or users of the statements.”

FASB’s second phase of the NFP model is underway and plans to review the requirements of a measure of operations, how to define a measure of operations and a potential realignment within the statement of cash flows.  The implementation date of the update is effective for annual financial statements issued for fiscal years beginning after December 15, 2017 and early implementation of the amendments within the update is permitted. Additionally, the amendments within the update should be applied on a retrospective basis in the year it is first implemented. If comparative financial statements are issued, the NFP has the option to omit information such as expenses by natural and functional classification as well as disclosures about liquidity and availability of resources.

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