Changes are coming, and nonprofit accounting audit services must be ready to answer the questions that arise from these changes. We’re talking about the changes to net asset classifications, part of FASB Accounting Standards Update No. 2016-14 Not-for-Profit Entities.
Although the effective date of the new changes was December 15, 2017, the new standards must be implemented by December 31, 2018, or fiscal years ending June 30, 2019. All the relevant requirements must be implemented the same year, so if you haven’t gotten started yet … now’s the time.
The Major Changes
There are seven major changes impacting nonprofits because of the FASB update. These include:
- Change the number and type of net asset classifications from three down to two
- Updated and improved disclosure relating to both classes of net assets
- Additional disclosure required as it pertains to qualitative and quantitative liquidity aspects
- The choice to eliminate indirect cash flow reconciliation when direct method cash flow is used instead
- Required presentation of both natural and functional classification of expenses, as well as enhanced disclosure of expense allocation methodologies
- Change in presentation and disclosure requirements for investment expenses
- Complete removal of the “over-time” release method for restrictions relating to long-lived assets
Not sure where to start? The most significant change for many nonprofits it the shift from classification of three net assets to two. The changes were intended to clear up any confusion on how to categorize funds. But, in addition to the changes in net asset classifications, there are also enhanced disclosure requirements in place, so both must be donated at the same time to fully comply with the changes requested in this update.
Let’s assume you have board restricted funds. You will still need to disclose the amount of board-restricted funds versus net assets without donor restrictions. Although you do not need to remove underwater endowment from net assets with donor restrictions, you do need to disclose the fair asset value.
The guidelines also suggest enhanced disclosure. By improving disclosure, you’ll help your nonprofit tell its story better, and help the public better understand how the monies are being apportioned and spent.
If you’d like examples of how to do this, AICPA provides several links to fictitious examples to showcase the best practices needed for disclosure and compliance with other aspects of ASU 2016-14.
More Resources on ASU 2016-14 from Beck & Company
That’s a lot to remember but, fortunately, Beck & Company has been sharing updates along the way about many of these topics.
See below for more information:
- Net Asset Classification changes – a detailed article on the changes in net asset classifications and what this might mean for your nonprofit.
- Categorizing grant revenues – how the changes to the ‘over time’ release method may impact assets.
- Additional clarification on FASB update and a summary of changes ASU 2016-14 call for in many nonprofits.
Nonprofit Accounting Audit Services Can Help
We’ve done our best to provide information about these impending changes in a timely fashion. If you still need assistance, Beck & Company can help. We offer nonprofit accounting audit services, accounting, tax and other consulting services to help nonprofits thrive.
Since 1987, we have helped many nonprofits in the Washington D.C. area and along the Eastern seaboard with their accounting and financial management needs. We provide audit, tax, accounting, and consulting service that addresses all aspects of a small to mid-sized nonprofit organization’s business. Contact us or call 703-834-0776 x8001.