The Financial Accounting Standards Board (FASB) recently issued Accounting Standards Update (ASU) 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities. This is the culmination of Phase 1 of a project that makes significant changes to not-for-profit financial reporting requirements that have been in place since 1993 (FASB Statement of Accounting Standards Nos. 116 and 117). The update aims to improve how a not-for-profit organization classifies its net assets and improves information in its financial statements and notes about its financial performance, cash flow and liquidity. With limited exceptions for certain disclosures, the new guidance is required to be applied on a retrospective basis for all years reported. The new guidance will be effective for annual financial statements for fiscal years beginning after December 15, 2017 and for interim periods with fiscal years beginning after December 15, 2018. Early adoption is permitted.
The key requirements of the new ASU are:
 Net Assets
• Required to be reported in two categories; net assets with donor restrictions and net assets without donor restrictions, replacing the current three categories; unrestricted, temporarily restricted, and permanently restricted categories
• Continued requirement to disclose the nature and amount of donor restrictions such as time, purpose, and perpetuity
• New disclosure requirement to communicate the amount, purpose, and type of governing board designations, appropriations, and similar actions that result in self-imposed limits on the use of resources without donor-imposed restrictions as of the end of the period
• Absent explicit restrictions, net assets with donor restrictions that are for the acquisition or construction of long-lived assets will be required to be released when the asset is placed in service, eliminating the alternative of recognizing the expiration of donor restrictions over time
 
“Underwater” Endowments
(When the fair market value of the investments in a particular endowment fund is less than the value of the gift that originally created the fund)
• Will now be included in net assets with donor restrictions rather than in net assets without donor restrictions
• In addition to aggregate amounts by which funds are underwater (current GAAP), new required disclosure of the aggregate of original gift amounts (or level required by donor or law), fair value, and any governing board policy, or actions taken, concerning appropriation from such funds
Cash Flow Statement
• NFPs will be allowed to choose between the direct method and the indirect method in presenting operating cash flows
• If the direct method is presented, an indirect reconciliation is no longer required

Liquidity and Availability of Resources
• Required footnote disclosure of qualitative information on how an NFP manages its liquid available resources and its liquidity risk
• Required quantitative disclosure on the face of the financial statements and/or in the footnotes communicating the availability of an NFP’s financial assets at the statement of financial position date to meet cash needs for general expenditures within one year
• Examples illustrating different ways entities might report such information have been included in the ASU
Expense Reporting
• Required reporting of expenses by function and by natural classification, either on the face of the financial statements or in the footnotes
• Required qualitative disclosures about methods used to allocate costs among program and support functions
• Enhanced guidance provided related to allocations from management and general expenses
Investment Return
• Required to be reported net of external and direct internal investment expenses (implementation guidance is provided to illustrate activities which constitute direct internal investing activities)
• Permitted but no longer required to disclose any investment expenses that are netted against investment return
• Investment return components are no longer required to be disaggregated in the endowment net asset rollforward
• NFPs are precluded from including external and direct internal investment expenses that have been netted against investment return in the functional expense analysis
Disclosures about Operating Measures by those NFPs that Choose to Present Such a Measure
• To the extent an operating measure is affected by internal board designations, appropriations, and similar actions, NFPs choosing to present an operating measure would be required to disaggregate and describe by type these internal transfers, either on the face of the financial statements or in the notes
• Examples illustrating different ways entities might report such information are included in the ASU
In light of the upcoming revenue recognition, lease accounting, and financial reporting standard update deadlines, Not-for-Profit organizations should start gaining an understanding of these new financial reporting standards immediately and consider implementing them early. It might be difficult to implement all three standards at the same time. WNDE is here to assist your organization should you require any additional guidance.