Prepare for New Accounting Standards!
Financial Statement Presentation: Not-for-Profit Entities
The implementation of ASU 2016-14 Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities will, among other things, improve the consistency in the reporting of functional expenses and clarify information regarding liquidity and availability of cash. This standard is effective for annual periods beginning after December 15, 2017, and includes:
- Revision of net asset classifications – adjust financial reports to classify net assets into two categories: Without Donor Restrictions and With Donor Restrictions, paying close attention to revisions for reporting underwater endowments, and provide the proper disclosures
- Reporting of all external and direct internal investment expenses as netted against investment return on the statement of activities
- Reporting of expenses by both functional and natural classification, using the improved guidance about items that are required to be reported as management and general expenses
- Disclosing the availability of the Organization’s financial assets at the balance sheet date to meet cash needs for general expenditures within one year of the balance sheet date. If the Organization does not have current assets readily available to meet general expenditures within one year of the balance sheet date, management must disclose its plan to meet cash requirements that will fund the year’s expenses.
The implementation of ASU 2014-09, Revenue from Contracts with Customers (Topic 606) also aims to improve comparability across industries and markets, and requires disclosures for clarity and understanding. While this standard is not effective until the annual period beginning after December 15, 2018, it is required that it be applied retrospectively. We recommend that management begin to apply the core principle of the standard by documenting the Organization’s revenue streams and going through the steps below to determine when revenue should be recognized.
- Identify the contract(s) with the customer
- Identify the performance obligations
- Determine the transaction price
- Allocate the transaction price
- Recognize revenue when (or as) a performance obligation is satisfied
We recommend that management begin reviewing all leases engaged in by the Organization (as a lessor or lessee) to start preparing for reporting changes and disclosure requirements included in ASU 2016-02 Leases (Topic 842), that will be effective for annual periods beginning after December 15, 2019. Under this new accounting standard, most leases will need to be recorded as a liability on your financial statements. You will also record an asset for the right to use the leased property.
Please contact us for additional information and guidance as you are going through the process of determining how these standards will affect your organization.