Not-for-Profit Insights Financial Statement
Usefulness
Change is on the way. Are you ready? FASB updates accounting standard for Not-for-Profits to improve financial statement usefulness ACCOUNTING STANDARDS UPDATE (ASU) 2016-14 – Presentation of Financial Statements of Not-for-Profit Entities – significantly changes generally accepted accounting principles (GAAP) that has guided Notfor-Profit entities (Topic 958) for decades. Prior to the release of this ASU, financial reporting practices for Not-for-Profit entities has been guided by FASB 116 and 117. So why the change? For years, the current accounting requirements for Not-for-Profits have been said to be overly complex with insufficient transparency and not enough useful information to help those who relied on the statements to make educated informed decisions about organizations. The ASU’s goal is to provide more transparent information regarding a Not-for-Profit organization’s overall financial statements by reducing complexities, reporting inconsistencies and misunderstandings, and provide more relevant information about the organization to donors, grantors and board members. The new ASU is designed to more accurately help Not-forProfits tell their story through their financial statements. The FASB’s ASU incorporates the following characteristics into GAAP to attain that greater transparency and achieve those supporting objectives:
Changes to Net Asset Classification Replacement of Three Net Asset Classes with Two Net Asset Classes CURRENT NOT-FOR-PROFIT STANDARDS DEFINE three classes of net assets – unrestricted (UR), temporarily restricted (TR) and permanently restricted (PR) net assets. Not-for-Profits are guided by donor restrictions to place the assets into one of those three categories. Over the years, organizations and users of the financial statements questioned if the three categories were useful. The disclosures for Not-for-Profits have increased significantly over the past five years and have blurred the usefulness of the three categories. In addition to donor restricted issues, there has been some confusion on board designated net assets (quasi-endowments) and whether such assets are restricted. The ASU eliminates the temporary and permanent restriction net asset classes and replaces them with just one new net asset class called “net assets with donor restrictions.” The current unrestricted group will be renamed to “net assets without donor restrictions.” All assets will now be grouped into one of these two categories. There are many benefits to moving to this type of reporting model.