The new disclosure requirements set by ASU 2016-14 require not-for-profits to do extra work in preparing their financial statements. These disclosures provide the benefit of providing a more transparent perspective of how an organization’s financial picture really looks.
ASU 2016-14 requires the following changes to financial statement presentation and disclosures:
- Net assets are no longer broken up between unrestricted, temporarily restricted, and permanently restricted. Net assets are now shown in two categories: with donor restrictions and without donor restrictions.
- Not-for-profits are now required to present disclosure of both qualitative and quantitative information on how they manage liquid resources to meet cash needs within one year of the date of the financial statements.
- A presentation of expenses by nature (wages, depreciation, repairs, and maintenance, etc.) and function (program, management and general, and fundraising) is now required. Many not-for-profits were already providing this, but it is now mandated.
- New requirements for disclosure of underwater endowments.
- Disclosure of board-designated net assets
- The requirement to provide a reconciliation from the direct method to the indirect method for the statement of cash flows is eliminated.
What Exactly Was Changed?
The change for net asset has simplified the presentation.
In the past, there was confusion in understanding what was meant by the three categories, particularly the difference between temporarily restricted and permanently restricted. Now, the difference between the two categories is clear: either the funds have no restrictions set by the donor or they do. Restricted funds include funds that have been provided by the donor for a specific purpose or a specific period of time.
The presentation of expenses by functional category provides more insight into how an organization uses its funds. By reviewing functional expenses, users of the financial statements can see if an organization is applying suitable funding towards the main service goals of the not-for-profit (program expenses). If the organization has too much expense going toward administrative costs, it could be a sign that the organization needs to adjust its cost structure to focus more activity towards furthering the organization’s mission.
What’s Most Useful to Know?
The presentation of liquidity may be the most useful of the new disclosures.
The disclosure shows the dollar amount of financial assets the organization has available to meet its cash requirements in the next year. The organization presents its financial assets and any limits on the use of those assets.
Financial assets include cash and other assets that can be converted into cash within the next year, for example, short-term investments and receivables, amongst others. Frequently, users of the financial statements will look at an organization’s net assets (the difference between assets and liabilities) as a way to judge the organization’s financial position. This can be misleading. If you remove assets that are tied up in things such as property and equipment, a different picture is presented.
For example, if an organization has $100,000 in net assets, but $300,000 is invested in property and equipment, the organization actually has a negative position and not a positive one. The liquidity disclosure allows the readers of the financial statements to get a better view of what assets they have to work within the coming year.
The Bottom Line
While the implementation of these new disclosures may add some difficulty to the preparation of the financial statements, they are providing useful information that benefits the organization’s preparing them and those using the financials to make judgments about the status of the organization.
