The current reporting model for nonprofit organizations has been in existence for more than 20 years. Many stakeholders raised the question as to whether a refreshed model would be more useful to users of nonprofit financial statements. The Financial Accounting Standards Board (FASB) analyzed the situation based on input from the nonprofit industry and concluded that improvements were in order. They then added the project Financial Statements of Not-for-Profit Entities to its agenda, which ultimately led to the issuance of Accounting Standards Update (ASU) 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities.
The goals of ASU 2016-14 are to improve the overall understandability, comparability, and usefulness of nonprofit financial statements. The ASU is not an overhaul but an update of existing standards for nonprofit organizations. The update to the current presentation of the net asset classification requirements is one major component of the project. Another aspect of the project was to work to improve the information provided by nonprofits to allow readers to be able to assess the liquidity, financial performance, and cash flows of nonprofit organizations.
Thus, the ASU is aimed at revising current reporting practices so that they are clarified to allow for clearer reporting on how restrictions on a nonprofit's resources affect liquidity. The ASU requires enhanced disclosures about financial assets and the extent to which they are not available in the near term because of limits imposed by donors, laws, and internal governing board actions. These expanded disclosures should assist users of nonprofit financial statements in assessing an entity's liquidity.
ASU 2016-14 affects substantially all nonprofit entities as defined in the FASB Accounting Standards Codification (ASC). Based on the ASC, nonprofit entities are defined as “an entity that possesses the following characteristics, in varying degrees, that distinguish it from a business entity: (a) contributions of significant amounts of resources from resource providers who do not expect commensurate or proportionate pecuniary return, (b) operating purposes other than to provide goods or services at a profit, and (c) absence of ownership interests like those of business entities.” While the first or second characteristic may or may not apply to your organization, the third most certainly should cover the industry as a whole.