Navigating FASB ASU 2016-14: A Guide for Non-Profit Organizations
In August 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-14, Non-Profit Entities (Topic 958): Presentation of Financial Statements of Non-Profit Entities. This update marked the first significant revision to non-profit financial reporting since 1993, aiming to enhance the relevance and usefulness of financial statements for donors, grant makers, creditors, and other stakeholders.
With its deep expertise in accounting, tax, and assurance services for non-profits, Calvetti Ferguson is here to help your organization understand and implement these crucial changes, ensuring compliance and maximizing the clarity of your financial reporting.
Key Changes Introduced by ASU 2016-14
ASU 2016-14 streamlines and clarifies how non-profit organizations present their financial information. Here’s a breakdown of the key areas impacted:
Net Asset Classification
Prior to ASU 2016-14, U.S. Generally Accepted Accounting Principles (GAAP) required three classes of net assets: unrestricted, temporarily restricted, and permanently restricted. The update simplifies this to two classes:
- Net assets with donor restrictions: This combines the previous temporarily restricted and permanently restricted net asset classes.
- Net assets without donor restrictions: This replaces the former unrestricted net asset class.
This change is reflected directly in the statement of financial position, providing a clearer picture of resources available to the organization. Calvetti Ferguson brings deep technical accounting expertise to help non-profits navigate complex reporting changes and ensure their financial statements accurately reflect new standards.
Liquidity and Availability of Resources
To provide users with a better understanding of an organization’s liquidity and how it’s managed, ASU 2016-14 requires enhanced disclosures, including:
- Quantitative information: Organizations must disclose the amount of financial assets available at the end of the period to meet general expenditures within one year of the balance sheet date.
- Qualitative information: Non-profits need to explain how they manage their liquid resources and their policy for managing liquidity. This includes information about the organization’s liquidity management strategies and the time horizon for those strategies.
Our dedicated team of specialists empowers non-profits to confidently address evolving accounting standards, ensuring robust compliance and maximizing the value of their financial reporting for all stakeholders.
Statement of Activities
The update brings several important changes to the statement of activities:
- Presentation of net asset classes: The change in both “net assets with donor restrictions” and “net assets without donor restrictions” must be presented on the face of the statement, along with the total change in net assets.
- Operating and non-operating activities: While not explicitly requiring an “operating income” subtotal, the update encourages organizations to present an intermediate measure of operations. This helps users understand the organization’s performance from its core activities.
- Expenses by nature and function: All non-profit organizations are now required to provide information about their operating expenses by both their natural classification (e.g., salaries, rent, utilities) and their functional classification (e.g., program services, management and general, fundraising). This can be presented on the statement of activities, as a separate statement, or in the financial statement notes, with enhanced disclosures on cost allocation methods. This provides greater transparency into how resources are being used.
Presentation of Operating Cash Flows
To improve clarity and usefulness, ASU 2016-14 allows for more flexibility in presenting cash flows from operating activities:
- Organizations can continue to use either the direct method or the indirect method for reporting cash flows from operating activities. The update removed the requirement to present a reconciliation if the direct method is used.
Background and Effective Date
The FASB initiated this project in 2011, responding to feedback from its Not-for-Profit Advisory Committee (NAC) and other stakeholders. While existing standards were considered sound, there was a consensus that updates were needed to provide more valuable information to donors, creditors, and other users.
ASU 2016-14 is 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. Early application is permitted.
Preparing Your Non-Profit for Compliance
While these changes have been in effect for some time, it’s crucial for non-profit organizations to continually assess their financial reporting practices to ensure ongoing compliance and to maximize the clarity and usefulness of their financial statements.
Calvetti Ferguson is committed to empowering non-profits by providing high-quality accounting, tax, and assurance services tailored to their unique financial challenges. Through our comprehensive advisory services, Calvetti Ferguson guides organizations in developing sophisticated financial strategies, fostering transparency, and meeting the highest standards of disclosure.
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