In the past few years, the Financial Accounting Standards Board (FASB) has released two major updates that affect many nonprofits—ASU 2016-14 and ASU 2016-02. This article will help you understand how these Accounting Standards Updates (ASUs) will apply to your organization, and how you can comply with them.
A failure to make the necessary changes can cause your organization be penalized if audited. This could also result in losing grant funding and other contributions, which could be even more catastrophic towards achieving your mission. Make sure your organization is up-to-date with accounting standards compliance!
ASU 2016-14 – effective for fiscal years beginning after December 15, 2017
The FASB has created these new standards with the goal of providing more accessible, useful information to stakeholders, while also reducing the complexity of reporting. ASU 2016-14 affects all nonprofit entities by introducing changes to:
• Expense classifications: All nonprofits will be required to disclose expenses organized under both natural and functional classifications, rather than the previous three classes of unrestricted, temporarily restricted, and permanently restricted.
• Disclosures about liquidity: There will be increased transparency regarding liquidity, including a requirement for organizations to show how cash needs will be met for the next year.
• Net asset classifications: Net assets will now be presented within two classes, divided into those with donor restrictions and those without donor restrictions.
• Treatment of donated resources: The new regulations eliminate the expiration of restrictions on capital gifts over time and require the use of the placed-in-service approach (in the absence of donor-explicit stipulations).
• Presentation of underwater endowments: These will now be classed as net assets with donor restrictions, and additional disclosures will be required.
• Presentation of cash flows: Nonprofits which choose the direct method of presenting operating cash flows will no longer be required to provide the indirect reconciliation as well.
ASU 2016-02, Leases (Topic 842) – effective for fiscal years beginning after December 15, 2019
This ASU provides new regulations which affect all organizations that lease assets, such as real estate, vehicles, and equipment. Previous standards differentiate reporting requirements based on whether an agreement is a capital lease or an operating lease. ASU 2016-02 changes this by requiring all leases with terms of more than 12 months to be reported in terms of assets and liabilities. Here are some additional areas which will be changing:
• Measuring and reporting: The method used to measure cash flows and expenses for each lease will depend on whether it’s a finance lease or an operating lease.
• Disclosures to stakeholders: In order to help readers of financial statements better understand cash flows related to leases, organizations will be required to disclose more information about details such as variable lease payments and lease renewal/termination options.
• Combined contracts: if a contract includes both lease and service components, nonprofits will still be required to separate these components. The difference is that ASU 2016-02 gives more guidance on how to do so.
Although ASU 2016-02 will not be effective until December of 2019, early adoption is allowed and advance preparation is advised. Your organization should begin considering these changes when negotiating any new leases and may want to modify existing leases. These regulations may change your priorities, especially if additional lease liabilities will have a strong effect on your balance sheet.
If you haven’t already made changes to your accounting practices based on these new requirements, you should do so as soon as possible. This is much easier if you use an accounting system that is built to automatically comply with nonprofit accounting standards. If you’re concerned about your ability to understand and implement these changes in a timely fashion, you should consider getting a consultation or even outsourcing your accounting.
This brief summary is intended to give you an idea of what might be changing for your organization’s accounting; if you’d like to learn more details about the accounting requirements introduced by ASU 2016-14 and ASU 2016-02, please contact Beth Allen.