FASB Accounting Standard Update 2016-14: Part 1
On April 27th, Brown Smith Wallace hosted a webinar on the FASB Accounting Standard Update 2016-14 (ASU 2016-14) featuring Katie Zahner, Manager in the Audit Services group of Brown Smith Wallace. The webinar was moderated by Janet Ramey, Principal and team leader of Brown Smith Wallace’s Not-for-Profit Services group, and featured guest panelist Barry Smith who served as technical expert.
During the live broadcast, Katie discussed key changes, including liquidity and availability of resources, net asset classifications, investment return, expenses, and cash flow statement. Katie also presented benefits of the key changes, example footnote disclosures and management considerations for how to prepare for the implementation.
WHAT IS THE BACKGROUND AND INTENT OF ASU 2016-14? This is the first major not-for-profit (NPO) guidance change since the mid-90s affecting all NPOs and the users of NPO financial statements. After much deliberation, the ASU was issued in August 2016 to improve existing standards for financial statement presentation. While FASB felt that current presentation and reporting were sound, the majority felt it could be improved to provide better information to donors, grantors, creditors and other users of the financial statements. FASB’s intent in developing this standard was to address issues brought forward from NPO financial statement users. Through the eyes of donors, creditors and grantors, there was room for improvement and clarity. These issues included complexity and understandability of net asset classifications, deficiencies in information presented regarding the organization’s liquidity and availability of resources, lack of consistency among the not-for-profit industry in reporting expenses and investment return, and misunderstanding of the cash flows.
SO WHAT CHANGED? The reporting changes of ASU 2016-14 are split into various segments.
- Liquidity and availability of resources: Focuses on new disclosures to provide information on what resources an organization has available for use in the near term, what resources are unavailable based on internal and external limitation, and strategies used to ensure cash needs are met specifically 12 months from the reporting date.
- Net asset classifications: Reduces the classes from three to two. The new class terms provide clarity with plain English titles of “with donor designation” and “without donor designation.” Enhanced disclosures providing information about limits placed on net assets by governing boards and donors.
- Underwater endowments: New requirement to report the endowment in its entirety, corpus/original gift plus market depreciation/appreciation, and under with donor designations. Enhanced disclosures to report aggregate amounts by which funds are underwater, aggregate of original gift amounts, fair value of underwater endowments, and the board policy to spend or not to spend funds.
- Expense reporting: All not-for-profits must report expense by nature and function in one location of the statements, as well as describe the methods used to allocate among functional categories.
- Investment return: The change and belief is that reporting of investment return net of related expenses provides a more comparable measure of investment return across all not-for-profits.
- Cash flow statement: While there was a strong push from FASB to require NPOs to present a direct cash flow statement, this proposed mandatory change did not make it to the final stages. Continuing to allow not-for-profits to present operating cash flows using either the direct method or the indirect method retains the current flexibility and freedom in financial reporting.
WHEN IS THE CHANGE EFFECTIVE? For calendar year-end, the effective date is December 31, 2018 and fiscal years it’s 2019.
IS EARLY ADOPTION AVAILABLE? Early adoption is permitted, however not many organizations are eager to rush into the change. Organizations are leaning more toward getting educated on the guidance, digesting the information and implementing at the effective date. These are significant reporting changes that require vetting out by management, advisors, and the board. If presenting comparative statements then the majority of the changes are to be presented retrospectively. The liquidity and available resources and functional expense new requirements are two of the changes that do not have to be presented retrospectively.
We will host part two of the Accounting Standard Update (ASU) changes in person on Wednesday, November 8, 2017 in Creve Coeur. More details for this event coming soon!
For more information on not-for-profit organizations, please contact Katie Zahner at 314.983.1209 or firstname.lastname@example.org.