We are right around the corner from 2017, and one can always count on a new year bringing change. For financial leaders in the US nonprofit sector, 2017 brings the first makeover issued by the Financial Accounting Standards Board (FASB) since 1993.

FASB’s first major set of updates in almost 25 years is all about providing better consistency and more visibility into impact for donors, grant-makers, and other constituents who consume and read nonprofit financial statements. The goal of these changes in FASB rules is to help nonprofits tell their financial stories in a way that is easier to analyze, with the focus being on footnotes and disclosures.

Here at NetSuite, we spend a lot of time thinking about how we help our grantees – the organizations who are receiving a software donation through NetSuite.org - and customers remove back-office barriers so that they, in turn, can spend more time focused on maximizing impact and scaling their social mission. In that spirit, we thought we’d take a moment to outline what, exactly, Accounting Standards Update No. 2016-14 is all about in a two-part series.

In this post, we will take a closer look at phase one of ASU 2016-14. Phase one applies substantially to all nonprofits that prepare audited financial statements on an annual basis; and we will be comparing the current vs. new requirements that are scheduled to go into effect December 2017.

Phase one guidance is centered on three key areas: 1) Net Asset classifications; 2) Liquidity and availability of resources; and 3) Recording of expenses. Today, I will be outlining the requirements for Net Asset classifications.

CHANGES TO NET ASSETS

Current: Today, FASB requires nonprofits to categorize net assets into three categories: unrestricted, temporarily restricted and permanently restricted. We’ve all gotten very used to managing our organization this way, and there is nothing in ASU 2016-14 that will require an organization to change the way in which they manage the separation of permanently restricted and temporarily restricted assets, if the financial leaders still want the face of the financial statements to reflect this separation.

New: In the interest of streamlining financial statements and giving organizations an opportunity to more clearly reflect useful information about the nature, type and amounts of donor restrictions, FASB will now require a minimum of only two Net Asset classes. These will be renamed to “without donor restrictions” and “with donor restrictions.” So, effectively, there will no longer be a requirement to distinguish permanently restricted and temporarily restricted Net Assets on the financial statement itself.

With this new categorization, the disclosures become increasingly meaningful. The intent is to highlight the fact that, often times, funds which are included within the net asset class now identified as “without donor restrictions” come with either legal or contractual requirements attached, most notably board designated, reserve fund, or capital improvement requirements. Therefore, disclosures will now require the amount, purpose and type of how net assets that are “without donor restrictions” will be utilized in the future. And, while there is no mandated separation between temporary and permanent net assets, the disclosures similarly need to reflect type, time and purpose of restrictions.

Additionally, there is a related new requirement for how underwater endowments are recorded. (NOTE: An “underwater” endowment is a permanent endowment where the market value is less than the value at the time of original funding). While the way in which underwater endowments are calculated is not changing, the accounting treatment within the Net Asset class is. Specifically, the aggregate amount of underwater endowments will now be required to be included in the “with donor restrictions” category, as opposed to the past rule, where this aggregate amount could be recorded in net assets “without donor restrictions.” Furthermore, disclosures will now require the original amount, the fair value amount and the underwater amount of endowments to be clearly outlined in footnotes.

In summary, the intent of these changes on the whole is to provide financial statement users with clear information about the type and purpose of funds, as well as the impact of the underwater funds to the organization.

** 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.

Don’t miss part 2 of this blog series, Measuring the Impact of FASB’s New Guidance on Nonprofit Liquidity, Expense Recording.

For additional information, please visit www.fasb.org.