After more than three years of debate and revision, the 20-year old reporting model for nonprofits is being replaced with a new and improved Accounting Standards Update (ASU). ASU 2016-14 presentation of financial statements of not-for-profit entities calls for big changes in the way not-for-profits report financials. It will change the way all nonprofits classify net assets and prepare financial statements.
FASB (Financial Accounting Standards Board) believes that this update will improve the financial statements of nonprofits and will provide more useful information to donors, creditors, grantors and other financial statement users.
This article lists the top 3 changes in nonprofits financial reporting that will be effective for fiscal years beginning after December 15, 2017 and for interim periods within fiscal years beginning after December 15, 2018.
- 1. Net Asset Classifications
As a result of the new standard, the three existing classes of net assets, which were unrestricted, temporarily restricted and permanently restricted, will now become two:
- Net assets without donor restrictions and
- Net assets with donor restrictions
To enhance readers’ understanding of the donor restrictions, footnote disclosures will be required to include the timing and nature of the restrictions, as well as the composition of net assets with donor restrictions at the end of the period. The disclosures will continue to show an analysis by time, purpose and perpetual restrictions.
- 2. Transparency and Utility of Liquidity Information
New disclosures will need to be made regarding the management of liquidity and the financial assets available to meet near-term demands for cash. Now the nonprofits need to provide quantitative and qualitative information about liquidity to its financial statement users. Nonprofits need to report the assets they have available to meet the cash needs of their nonprofit within one year of the balance sheet date.
- 3. Presentation of Cash Flow Information
Under the new standard, nonprofits may continue to present cash flows from operations using either the direct or indirect method. Those nonprofits that are using the direct method for reconciliation, now no longer need to also present the indirect method reconciliation. The purpose of this change is to allow an organization to select the method that best serves the needs of the entity, providing greater flexibility in financial reporting.
Nonprofits will have to determine how the changes listed above impact them and what modifications they need to make to their existing financial processes to comply with the new reporting requirements.
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