The Federal Accounting Standards Board (FASB) has released new standards for not-for-profit (NFP) organizations that take effect for the year ended December 31, 2018. These updates change the type and presentation of information in organization’s financial statements in an attempt to give more information to donors, grantors, creditors, and other users of them.

Learn more about the standard from the AICPA or read the document in full on the FASB’s website.

Summary of Changes

The FASB’s standards affect five major areas of financial reporting:

Change Explanation
Net asset classification

Net assets will no longer be reported as one of these three categories:

  • Unrestricted
  • Temporarily Restricted
  • Permanently Restricted

Instead, NFPs will only need to use two:

  • With Donor Restrictions
  • Without Donor Restrictions
Qualitative and quantitative information on liquidity NFPs will be required to describe and quantify how they manage risk and their ability to pay general expenditures for the next year.
Presentation of investment expenses NFPs will net current investment expenses against investment return and will no longer break expenses out separately.
Expense reporting by both function and nature An analysis on expenses must be included in NFP financial statements, in addition to disclosures about the methods used to allocate program costs.
Optional presentation of statement of cash flows NFPs that present their statement of cash flows using the direct method will have the option to not present the indirect method reconciliation.

 

Net Asset Classification

The new NFP financial statement standards reduce the complexity of net asset classifications by condensing the previous three categories (Unrestricted, Temporarily Restricted, and Permanently Restricted) into two: With Donor Restrictions and Without Donor Restrictions.

The financial statements will still describe the nature and timing of such restrictions in the footnotes to provide users with helpful information about these assets.

Qualitative and Quantitative Information on Liquidity

Information about an NFP’s liquidity helps financial statement users understand the organization’s risk management strategy in clear terms. Requiring non-profits to disclose the amount and type of assets that can be used to cover expenses in the case of funding loss provides users with a better understanding of the financial stability of the organization.

The AICPA recommends including a classified balance sheet in the financial statements to provide this information.

Presentation of Investment Expenses

Under the new rules, NFPs must provide the net amount of investment expenses versus investment returns on the statement of activities. At the same time, organizations no longer have to disclose the components of investment expenses in the financial statements.

Expense Reporting by Both Function and Nature

Though NFPs may put the statement on either a new statement, the statement of activities, or in the footnotes, they must have an analysis of expenses by both function and natural classification. For non-profits with multiple programs, a separate statement is likely the most effective way to organize this analysis.

In addition, the footnotes must contain disclosures on how costs are allocated between the organization’s programs and supporting activities.

Optional Presentation of Statement of Cash Flows

As was true under the previous rules, NFPs will still be able to present their statement of cash flows using either the direct or indirect method. For those who present using the direct method, FASB now allows organizations to choose whether to include the indirect method reconciliation or omit it. This helps clarify the statement for users of the financial statements.

Implementing Changes

Not every change in FASB’s updated standard is listed here. Though most of these changes are merely cosmetic, they are required beginning with December 31, 2018 year ends. If you would like help understanding these changes and how they may affect your non-profit, feel free to give us a call or contact us online. We are here to serve!

The Federal Accounting Standards Board (FASB) has released new standards for not-for-profit (NFP) organizations that take effect for the year ended December 31, 2018. These updates change the type and presentation of information in organization’s financial statements in an attempt to give more information to donors, grantors, creditors, and other users of them.

Learn more about the standard from the AICPA or read the document in full on the FASB’s website.

Summary of Changes

The FASB’s standards affect five major areas of financial reporting:

Change Explanation
Net asset classification

Net assets will no longer be reported as one of these three categories:

  • Unrestricted
  • Temporarily Restricted
  • Permanently Restricted

Instead, NFPs will only need to use two:

  • With Donor Restrictions
  • Without Donor Restrictions
Qualitative and quantitative information on liquidity NFPs will be required to describe and quantify how they manage risk and their ability to pay general expenditures for the next year.
Presentation of investment expenses NFPs will net current investment expenses against investment return and will no longer break expenses out separately.
Expense reporting by both function and nature An analysis on expenses must be included in NFP financial statements, in addition to disclosures about the methods used to allocate program costs.
Optional presentation of statement of cash flows NFPs that present their statement of cash flows using the direct method will have the option to not present the indirect method reconciliation.

 

Net Asset Classification

The new NFP financial statement standards reduce the complexity of net asset classifications by condensing the previous three categories (Unrestricted, Temporarily Restricted, and Permanently Restricted) into two: With Donor Restrictions and Without Donor Restrictions.

The financial statements will still describe the nature and timing of such restrictions in the footnotes to provide users with helpful information about these assets.

Qualitative and Quantitative Information on Liquidity

Information about an NFP’s liquidity helps financial statement users understand the organization’s risk management strategy in clear terms. Requiring non-profits to disclose the amount and type of assets that can be used to cover expenses in the case of funding loss provides users with a better understanding of the financial stability of the organization.

The AICPA recommends including a classified balance sheet in the financial statements to provide this information.

Presentation of Investment Expenses

Under the new rules, NFPs must provide the net amount of investment expenses versus investment returns on the statement of activities. At the same time, organizations no longer have to disclose the components of investment expenses in the financial statements.

Expense Reporting by Both Function and Nature

Though NFPs may put the statement on either a new statement, the statement of activities, or in the footnotes, they must have an analysis of expenses by both function and natural classification. For non-profits with multiple programs, a separate statement is likely the most effective way to organize this analysis.

In addition, the footnotes must contain disclosures on how costs are allocated between the organization’s programs and supporting activities.

Optional Presentation of Statement of Cash Flows

As was true under the previous rules, NFPs will still be able to present their statement of cash flows using either the direct or indirect method. For those who present using the direct method, FASB now allows organizations to choose whether to include the indirect method reconciliation or omit it. This helps clarify the statement for users of the financial statements.

Implementing Changes

Not every change in FASB’s updated standard is listed here. Though most of these changes are merely cosmetic, they are required beginning with December 31, 2018 year ends. If you would like help understanding these changes and how they may affect your non-profit, feel free to give us a call or contact us online. We are here to serve!