November 5, 2018
Published: Journal of Accountancy
By Christopher M. Gordon, CPA, and Ruth Granlund, CPA
Tax-exempt organizations are working through the biggest change to not-for-profit financial reporting in 25 years. FASB Accounting Standard Update (ASU) No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities, brings significant changes for all not-for-profit organizations, and implementation may require a significant investment of time and effort.
While this can be particularly challenging for smaller organizations with limited staff, the following considerations and best practices can help ease implementation for these organizations and the CPAs working with them.
A look at the changes
ASU 2016-14 is an enhancement, not an overhaul, of existing guidance. The goal is to reduce some of the complexities of not-for-profit reporting while making it easier for financial statement users to understand an organization’s financial position and related activities.
The changes are designed to improve the presentation of information communicated in not-for-profit financial statements, in particular net assets, liquidity, financial performance, and cash flows. ASU 2016-14 emphasizes liquidity and statement of financial position improvements.
ASU 2016-14 is effective for organizations with calendar-year 2018 and fiscal-year 2019 year ends. The impact on smaller organizations depends on the complexity and nature of their financial statements. There are several aspects that affect nearly every organization, including net asset classifications, liquidity and availability of resources, and the functional allocation of expenses. The remaining changes, such as endowments, board-designated net assets, and statement of cash flows, affect a smaller number of organizations.
This article highlights six of the main provisions of ASU 2016-14.
1. Net asset classifications
2. Information about liquidity and availability of resources
3. Functional allocation
5. Board-designated net assets
6. Statement of cash flows
Organizations should consider the following in their preparation and adoption of ASU 2016-14:
1. Understand the main elements of the update and communicate with key users as necessary.
2. Create and document an implementation plan and use a checklist (with timelines) and an accounting system that complies with not-for-profit accounting.
3. Consider recasting prior-year financial information under the current-year standards to identify missing or potentially problematic areas.
4. Consult with the organization’s auditors to determine their expectations.
Finally, remember that these changes are designed to help not-for-profits improve their financial reporting. Although implementing ASU 2016-14 requires time and work, it allows organizations to better tell their financial stories.