In Part 2 of this blog series, we will be further reviewing how FASB’s new updates will change the way nonprofits regulate their financial statements. As promised, we will be covering changes to liquidity and availability of resources, and recording of expenses.
LIQUIDITY AND AVAILABILITY OF RESOURCES:
Current: Under today’s FASB requirements, there is no mandated disclosure about liquidity of resources. In the past, this has made it challenging for financial statement users to understand the availability of funds for nonprofits to meet their daily business operations (i.e. general expenditures).
New: With the FASB updates, there are two major changes in how nonprofits disclose resource availability: (1) Nonprofits will now be required to provide qualitative information about how the organization manages its liquidity risk. This includes additional insights about cash on hand, operating reserves, committed lines of credit, or anything else that impacts funds available for daily operations; (2) Nonprofits will also be required to quantitatively reflect the availability of their financial assets, as of the balance sheet date, to meet operating obligations for general expenditures that are available within one year. This calculation would exclude contributions to be received beyond a 12-month time frame or restricted for a specific purpose (i.e. board designated funds). The major objective of these new stipulations is to highlight the amount of funds a nonprofit has to meet cash needs for general expenditures over the coming 12 months.
PRESENTATION OF EXPENSES:
Current: Today, FASB requires the reporting of expenses by function (Statement of Functional Expenses – Management &General, Fundraising and Program Services).
New: There is now an additional requirement to disclose expenses by nature and type, which many nonprofits already do today, but is not required by GAAP. The key difference going forward is that if the face of the financial statement itself reflects function, then a disclosure/footnote must include an analysis of account nature within function, and vice-versa. To be clear, if both function and nature are already included in an organization’s Statement of Activities, then there is nothing that organization needs to do differently in 2017. The update also includes new guidance for nonprofits to manage allocations from M&G to programs (largely aligned to direct supervision principles). Additionally, nonprofits will now have to outline in disclosures or footnotes the methods utilized for allocations among program and support functions. The main goal for these additions by FASB is to provide more consistency in expense and allocation definitions and methodologies.
In addition to the previously outlined categories, ASU 2016-14 also includes the following:
- Clarification that a nonprofit may choose to use either the indirect or direct cash flow method.
- Improved reporting of investment return (net vs gross).
- Use of implied time restriction for expiration of capital restrictions is no longer an available option when releasing funds with capital restriction requirements.
We hope this short series has helped you to better understand the key points of ASU 2016-14, and you can now return to focusing on the season of annual appeals and goal setting with a bit more confidence on these right-around-the-corner changes. For our NetSuite nonprofit grantees and customers, implementation of these changes can be enabled simply by leveraging the flexibility of NetSuite’s segmentation and reporting structure. NetSuite’s SuiteGL capabilities allow our customers to easily track and update Net Asset classes by restriction, and analyze and report on all required segmentation.
Whether your organization is facing regulatory changes like the FASB updates outlined here, or you seek increased transparency on financial transactions and outcomes, NetSuite is here to help simplify your systems by providing easy ways to configure and customize your organization’s operations, thus providing you the freedom and power to fuel your mission.
In case you missed it – Part 1: What does FASB's New Guidance Mean for Nonprofits?
** The amendments in this FASB update 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. Application to interim financial statements is permitted but not required in the initial year of application.
For additional information, please visit www.fasb.org.