As the end of 2017 approaches and your not-for-profit organization begins planning for next year, it is important to be aware of the upcoming changes that will impact the preparation of your 2018 financial statements. As these changes will ultimately apply to annual financial statements for the years ending December 31, 2018 and beyond, early consideration will ease the implementation process and assist your organization with combining financial reporting and financial management. Presented in ASU 2016-14 Not-for-Profit Entities (Topic 958) Presentation of Financial Statements of Not-for-Profits Entities, the following modifications will be made to the financial statements of not-for-profit organizations:
1. Reducing of the classes of net assets from three classes to two classes. The statement of financial position of not-for-profit organizations currently includes the presentation of unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets. The reporting changes reduce the classifications of net assets to those with donor restrictions and net assets to those without donor restrictions.
2. Reducing the presentation of the changes in net assets from three classes to two classes. The statement of activities of not-for-profit organizations currently requires the reporting of changes by each of the three net asset classifications. As a result of the reduction of the required classification of net assets from three classes to two, the statement of activities will only present the changes in net assets for the two net asset classifications.
3. Eliminating the presentation of the indirect cash flow method when the direct method is utilized. When a cash flow statement is prepared using the direct method, a not-for-profit organization is currently required to also present the cash flow statement on the indirect method. The new reporting changes eliminate the requirement to present the indirect method when the direct method is used.
4. Enhanced footnote disclosures. The enhanced footnote disclosures include additional reporting of board designations and appropriations, reporting the composition of net assets with donor restrictions, information regarding the management of liquid assets including the ability to meet cash needs within one year of the financial statement reporting date, information regarding the availability of financial assets for general expenditure within one year of the financial statement reporting date, the presentation of expenses by natural classification, the methods utilized to allocate expenses between program and support classification, and the disclosures regarding certain underwater endowment funds.
Given the robust nature of these reporting changes, your not-for-profit organization should design and execute an implementation plan that includes the following steps:
1. Review donor-restricted net assets to ensure proper classification. This creates an opportunity to determine if restrictions have lapsed, which would allow reclassification to unrestricted assets.
2. Review board designations to ensure proper classification as well as determine if certain board restrictions have been satisfied, which might allow reclassification.
3. Review the budgeting process to include cash flow projections in order to assist with cash and financial asset liquidity disclosures.
4. Review and document formulas which allocate expenses between program and support expenditures.
For assistance regarding these changes or any other matter, please contact Kassouf & Co.