The Financial Accounting Standards Board (FASB) finally dropped its promised accounting standards update (ASU) on the nonprofit sector this week. The not-for-profit ASU is “intended to simplify and improve how a [nonprofit] organization classifies its net assets, as well as the information it presents in financial statements and notes about its liquidity, financial performance, and cash flows.” The previous ASU was 20 years old.
“The major changes really revolve around the net asset classification,” FASB board member Larry Smith told Accounting Today. “We’ll be changing the three net asset classes that we have now, which are unrestricted, temporarily restricted and permanently restricted. We’ll just have two classifications: unrestricted and donor restricted. That will hopefully make things more evident and remove some of the confusion that exists today.”
So what financial areas is FASB trying to improve with this new ASU? According to FASB, the new ASU addresses:
- Complexity and understandability of net asset classifications.
- Deficiencies in information about liquidity and availability of resources.
- Lack of consistency in the type of information provided about expenses and investment return.
- Misunderstandings about and opportunities to enhance the utility of the statement of cash flows.
The updates are effective for annual financial statements issued for fiscal years beginning after December 15, 2017, and for interim periods within fiscal years beginning after December 15, 2018.
“We’d advise that nonprofits quickly do three things,” Lee Klumpp, director in BDO USA’s Nonprofit Institute for Excellence, told Accounting Today. “First, read and digest the guidance, then consider speaking with advisors about your options. The third step is to discuss it with your board. Boards count on financial statements and absolutely need to be a part of the process for managing implementation.”
FASB plans to host a webcast entitled “In Focus: FASB Accounting Standards Update on Not-for-Profit Financial Statements,” on September 13, 2016. For more information or to register for the event, click here.