The Financial Accounting Standards Board (FASB) has issued several Accounting Standards Updates (ASU) that affect the preparation of nonprofit financial statements. A major effect of these pronouncements is an increase in the amount of information that needs to be included in the footnotes to provide expanded information to the reader and increase the transparency of the numbers included in the financial statements. Users of financial statements are being provided with more and more information, but the user needs to understand the additional information provided to be able to draw accurate conclusions regarding the entity.
The effective dates noted here are based on the effective date of these ASUs for nonpublic entities. Certain ASUs consider nonprofit organizations that have issued, or are a conduit bond obligor (that is, holder of certain limited-obligation revenue bonds or similar debt instruments issued by a state or local governmental entity), of securities that are traded, listed, or quoted on an exchange or over-the-counter market to be subject to the effective date established for public business entities. If an organization meets the definition of a public business entity in the specific ASU, they may need to adjust the effective dates of these requirements to those for a public business entity. Generally, the effective dates will be a year earlier for public business entities. Please refer to the actual ASU for the full information on effective dates.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is a comprehensive new revenue recognition standard that will supersede existing revenue recognition guidance. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. FASB issued ASU 2015-14 that deferred the effective date of ASU 2014-09 until annual periods beginning after December 15, 2018. Earlier adoption is permitted subject to certain limitations. The amendments in this update are required to be applied retrospectively to each prior reporting period presented or with the cumulative effect being recognized at the date of initial application.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements–Going Concern (Subtopic 205-40): Disclosures of Uncertainties about an Entity's Ability to Continue as a Going Concern. The update provides guidance about management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern. The update also provides related disclosures. The guidance is effective for annual periods ending after December 15, 2016.
In May 2015, the FASB issued ASU 2015-07, Fair Value (Topic 820), Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or Equivalent), which allows for those entities that have elected the practical expedient to use the net asset value (NAV) as a measure of fair value and to no longer categorize these investments within the fair value hierarchy. The practical expedient criteria differ from the criteria used to categorize other fair value measurements within the hierarchy. A reporting entity should continue to disclose information on investments for which fair value is measured at NAV (or its equivalent) as a practical expedient to help users understand the nature and risks of the investments and whether the investments, if sold, are probable of being sold at amounts different from NAV. The ASU is effective for fiscal years beginning after December 15, 2016, with early application permitted and should be applied retrospectively. The retrospective approach requires that an investment for which fair value is measured using the NAV practical expedient be removed from the fair value hierarchy in all periods presented in an entity's financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the statement of financial position (balance sheet) and disclosing key information about leasing arrangements for lessees and lessors. The new standard applies a right-of-use (ROU) model that requires, for all leases with a lease term of more than 12 months, an asset representing its right to use the underlying asset for the lease term and a liability to make lease payments to be recorded. The ASU is effective for fiscal years beginning after December 15, 2019, with early adoption permitted.
In August 2016, the FASB issued ASU 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities. The ASU amends the current reporting model for nonprofit organizations and enhances their required disclosures. The major changes include: (a) requiring the presentation of only two classes of net assets now titled “net assets without donor restrictions” and “net assets with donor restrictions,” (b) modifying the presentation of underwater endowment funds and related disclosures, (c) requiring the use of the placed-in-service approach to recognize the expirations of restrictions on gifts used to acquire or construct long-lived assets absent explicit donor stipulations otherwise, (d) requiring that all nonprofits present an analysis of expenses by function and nature in either the statement of activities, a separate statement, or in the notes and disclose a summary of the allocation methods used to allocate costs, (e) requiring the disclosure of quantitative and qualitative information regarding liquidity and availability of resources, (f) presenting investment return net of external and direct internal investment expenses, and (g) modifying other financial statement reporting requirements and disclosures intended to increase the usefulness of nonprofit financial statements. The ASU is effective for the financial statements for fiscal years beginning after December 15, 2017. Early adoption is permitted. The provisions of the ASU must be applied on a retrospective basis for all years presented although certain optional practical expedients are available for periods presented before the adoption of the ASU.
When the FASB was developing ASU 2016-14, there were certain issues that were moved to Phase 2 of the project that needed more time to be addressed based on the feedback from constituents. The items that were moved to Phase 2 of this project were:
As of the date of this publication, there wasn't a stated time frame for the completion of Phase 2 of the project. If you want to stay abreast of any discussions related to the topics in Phase 2, you can access this on the FASB website at www.fasb.org.
The FASB has added a project entitled “Revenue Recognition of Grants and Contracts by Not-for-Profit Entities” to their agenda. This project was added to address the difficulty and diversity in practice for recognizing revenue from grants and contracts for not-for-profit entities that stem from the following two issues:
This project is in process and once resolved the outcome will impact how these transactions are recorded.