Ready for the new not-for-profit accounting standard?

A new accounting standard goes into effect starting in 2018 for churches, charities and other not-for-profit entities.

Here’s a summary of the major changes:

Group of people around the worldNet asset classifications
The existing rules require not-for-profit organizations to classify their net assets as either unrestricted, temporarily restricted or permanently restricted. But under Accounting Standards Update (ASU) No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities, there will be only two classes: net assets with donor restrictions and net assets without donor restrictions.

The simplified approach recognizes changes in the law that now allow organizations to spend from a permanently restricted endowment even if its fair value has fallen below the original endowed gift amount. Such “underwater” endowments will now be classified as net assets with donor restrictions, along with being subject to expanded disclosure requirements. In addition, the new standard eliminates the current “over-time” method for handling the expiration of restrictions on gifts used to purchase or build long-lived assets (such as buildings).

Other major changes
The new standard includes specific requirements to help financial statement users better assess a nonprofit’s operations. Specifically, organizations must provide information about:

Liquidity and availability of resources. This includes qualitative and quantitative  disclosures about how they expect to meet cash needs for general expenses within one  year of the balance sheet date.

Expenses. The new standard requires all not-for-profit entities to report expenses by  both function (which is already required) and nature in one location. In addition, it calls  for enhanced disclosures regarding specific methods used to allocate costs among  program and support functions.

 Investment returns. Organizations will be required to net all external and direct internal  investment expenses against the investment return presented on the statement of  activities. This will facilitate comparisons among different not-for-profit entities,  regardless of whether investments are managed externally (for example, by an outside  investment manager who charges management fees) or internally (by staff).

Additionally, the new standard allows not-for-profit entities to use either the direct or indirect method to present net cash from operations on the statement of cash flows. The two methods produce the same results, but the direct method tends to be more understandable to financial statement users. To encourage not-for-profits to use the direct method, entities that opt for the direct method will no longer need to reconcile their presentation with the indirect method.

To be continued
ASU 2016-14 is the first major change to the accounting rules for not-for-profits since 1993. However, it’s only phase one of a larger project to enhance financial reporting transparency for donors, grantors, creditors and other users of not-for-profits’ financial statements.

Our best advice is: “Don’t go it alone.” If you have questions, contact Michael B. Klein, CPA, MBA, Ciuni & Panichi, Inc. Partner who leads the Not-for-Profit Group at 216-831-7171 or mklein@cp-advisors.com.

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