The Not-for-Profit Accounting Update You Need to Know About
Jimmy Mo, an EisnerAmper partner who leads the firm’s Not-for-Profit Services Group in Pennsylvania, reviews FASB ASU 2016-14. If you’re a not-for-profit executive, you need to know about this update and its 5 requirements. Jimmy talks about the reason for this significant update, implementation timeline, the opportunity it represents, and why you shouldn’t wait to have a conversation with your business advisor.
Dave Plaskow: Hello and welcome to EisnerAmper’s podcast series. We’re always interested in the latest trends and developments as well as any related business and accounting opportunities and challenges. Today we’re going to examine the new accounting standard update - Preparation of Financial Statements for Not-for-Profit Entities. I’m your host Dave Plaskow and with us today is Jimmy Mo, an EisnerAmper partner who leads the firm’s not-for-profit services group in Pennsylvania. Jimmy, welcome and thanks for being here.
Jimmy Mo: Great to be here Dave.
DP: So Jimmy, why FASB ASU 2016-14, what’s it all about?
JM: Dave, it’s an effort to improve information presented in a not-for-profit entity’s financial statements. It’s meant to provide more useful and transparent information to users of not-for-profit financial statements.
DP: Ok, so transparency being the key word there. Now, what are the five areas that it focuses on?
JM:Well Dave, it includes qualitative and quantitative requirements for the following: Number 1, Net Asset Classes, number 2, Investment Return, number 3, Expenses, number 4, Liquidity and Availability of Resources, and number 5, Presentation of Operating Cash Flows
DP: Ok, now I don’t think we have enough time today to do a deep dive on all five, but there’s two in particular that you think our listeners need to be aware of. What are those two?
JM:Yes, so the first one’s in regards to net asset classes. Under the current standards a not-for-profit’s financial statements are classified into three different classes of net assets – unrestricted, temporarily restricted and permanently restricted. So with the new standard in affect the net asset classifications will change. So the unrestricted net assets will be renamed “net assets without donor restriction” while the temporarily and permanently restricted net assets are going to be combined to become “net assets with donor restriction”. In addition not-for-profits are also going to be required to disclose the nature and amounts of any board designated net assets.
DP: Now let’s spend a minute on the other area which is liquidity and availability of resources.
JM:So Dave, the new standard adds a new requirement in regards to liquidity, requiring a not-for-profit to disclose liquidity both quantitatively and qualitatively. A not-for-profit will be required to disclose quantitatively what will be deemed as a liquid asset, which is defined as “financial assets that are available for general operating use within one year of the statement of financial position date”. In addition from a qualitative perspective, a not-for-profit is required to disclose how it manages its liquidity and its liquidity risk.
DP: Ok. Now Jimmy, what’s the timeline for this new standard?
JM: The standard is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. Accordingly, ASU 2016-14 is effective in 2018 for not-for-profits with a December 31st year end, and in 2019 for not-for-profits with all other year ends.
DP: So Jimmy, aside from the technical requirements, what are the one or two key takeaways here for our listeners?
JM:Well Dave, I think there are two takeaways here. The first one is take this time now before the standard is effective to examine and possibly update your policies and procedures. Since certain policies and procedures are now required to be disclosed on the financial statements, it is recommended that a not-for-profit review those policies and procedures to, number one, have a policy that’s effective that you would be able to disclose. Number two, if you have a policy to ensure that that policy paints the best picture of your organization. On number two, work closely with your business advisor. They have the resources and they have the expertise to help you and also to provide best practices if needed.
DP: Ok, excellent. Well Jimmy, thanks for your expertise and the valuable insight here.
DP: And thank you for listening to EisnerAmper’s not-for-profit podcast series. Visit EisnerAmper.com for more information on this, and a host of other topics. And join us for our next EisnerAmper podcast when we get down to business.