If you have anything to do with preparing financial statements for U.S. not-for-profit organizations, then you certainly have something to look forward to in 2018.
No, I’m not talking about the Congressional midterm elections. I’m talking about the Financial Accounting Standards Board’s Accounting Standards Update 2016-14, which will bring about the biggest changes to not-for-profit (NFP) financial statements in decades.
What’s the big deal?
For the most part, ASU 2016-14 is about changing how NFP financial statements that are audited, reviewed or compiled by a CPA are presented.
The changes will mostly affect the financial statements of NFPs with endowment funds, board-designated net assets, and/or significant investment holdings. If your organization has only two net asset classes (unrestricted and temporarily restricted) the changes will be much less noticeable.
It will have minimal impact to how accounting staff actually deal with debits and credits throughout the year, and will only affect financial statements for years ending in December 2018 and later. But while that gives you almost two years to prepare for the new standards, you should start talking to your accountants and independent auditors about them now.
The coming changes to financial statements
The new standards impose various changes on nonprofit financial statement presentation and note disclosures. But today we’re focusing on how net assets will be presented in the equity section of the statement of financial position (i.e. balance sheet).
Traditionally, NFPs work with three different classes of net assets: unrestricted, temporarily restricted and permanently restricted. However, under the new standards there will only be two classes: Without Donor Restrictions and With Donor Restrictions.
So, two classes instead of three. That will make things simpler, right?
Not really. Each class will have additional categories (line items) to give readers further insight into the organization’s net assets. And so the net assets/equity section of the statement of financial position will look like this:
Without Donor Restrictions
- Designated by the Board for endowment
- Designated by the Board for other
- Invested in property & equipment, net of related debt
With Donor Restrictions
- Perpetual in nature
- Purpose restrictions
- Time-restricted for future periods
- Underwater endowments
The American Institute of CPAs has published examples of nonprofit financial statements that conform to ASU 2016-14 to show you what they might look like.
What you can do now
If you use Xero or Quickbooks in your organization, we recommend creating equity accounts for each of the categories we’ve mentioned.
Unfortunately, these accounting applications aren’t designed to do fund accounting. You’ll need to update the balances manually (using monthly or quarterly journal entries) based on the revenue and expense activity pertaining to the respective categories.
In a future blog article, we’ll talk about how to modify the class structure in your organization’s accounting system so it conforms to the new standards. But in the meantime, if you have any questions don’t hesitate to get in touch with us.