In 1993, FASB introduced SFAS 116 and 117. These standards revolutionized nonprofit financial reporting. They established guidelines for contribution recognition and financial statement presentation. For over two decades, these standards served as the backbone of nonprofit accounting.

SFAS 116 focused on accounting for contributions received and made. It provided clear guidance on how to recognize and measure contributions, including distinguishing between conditional and unconditional promises to give. This standard significantly improved the consistency and comparability of contribution reporting across nonprofit organizations.

SFAS 117 addressed the presentation of financial statements. It introduced the concept of three classes of net assets: unrestricted, temporarily restricted, and permanently restricted. This classification system helped users of financial statements better understand the nature and extent of donor-imposed restrictions on a nonprofit’s resources.

However, the nonprofit sector has changed dramatically since 1993. New challenges and complexities emerged. The rise of social enterprises, increased scrutiny from donors and regulators, and the growing importance of impact measurement all contributed to a need for updated accounting standards. FASB recognized the need for updated standards to reflect these changes and better serve the evolving needs of nonprofit organizations and their stakeholders.

Introducing ASU 2016-14: The New FASB Standards

In August 2016, FASB released Accounting Standards Update (ASU) 2016-14. This update aims to improve nonprofit financial reporting. It became effective for fiscal years beginning after December 15, 2017. The new standards represent a significant shift in nonprofit financial reporting, addressing many of the challenges and limitations of the previous standards.

Key Changes in ASU 2016-14

Net Asset Classification for Nonprofits

ASU 2016-14 simplifies net asset classification. It reduces the categories from three to two:

1. Net assets with donor restrictions
2. Net assets without donor restrictions

This change provides clearer information about a nonprofit’s resources and restrictions. By consolidating temporarily and permanently restricted net assets into a single category, the new standards aim to reduce confusion and provide a more accurate picture of a nonprofit’s financial position.

The new classification system also requires enhanced disclosures about the nature, amounts, and effects of various types of donor-imposed restrictions. This includes information about underwater endowment funds, which was not previously required.

FASB Transparency Requirements for Nonprofits

The new standards enhance transparency in several ways:

1. Liquidity disclosures: Organizations must provide information about their financial assets and liquidity. This includes both qualitative and quantitative information about how a nonprofit manages its liquid resources and its availability to meet cash needs for general expenditures within one year of the balance sheet date.
2. Functional expense reporting: Expenses must be reported by both nature and function. This means nonprofits must present an analysis of expenses by functional and natural classifications in one location, either on the face of the statement of activities, as a separate statement, or in the notes to the financial statements.
3. Investment return presentation: Investment returns are now reported net of external and direct internal investment expenses. This simplifies the reporting of investment returns and provides a more accurate picture of the net return on investments.

These changes offer stakeholders a more comprehensive view of a nonprofit’s financial health. They address long-standing concerns about the clarity and usefulness of nonprofit financial statements, particularly in areas such as liquidity and the true cost of programs and services.

Why the New Standards Matter

ASU 2016-14 improves transparency and clarity for all stakeholders. It enhances comparability among nonprofit organizations. The standards better reflect modern nonprofit operations and challenges.

Donors and grantmakers can make more informed decisions based on clearer financial information. They can better understand a nonprofit’s financial health, including its ability to meet short-term obligations and the true cost of its programs.

Board members and management gain clearer insights into their organization’s finances. The new liquidity disclosures, in particular, can help boards and management teams better assess and plan for financial sustainability.

Auditors and regulators benefit from more consistent reporting across the sector. This consistency makes it easier to identify potential issues and compare financial performance across different organizations.

Implementing ASU 2016-14: Challenges and Best Practices

If you are still using the previous standards, adoption of ASU 2015-14 can be challenging. Organizations may need to update their accounting systems and processes. Staff training is often necessary to ensure proper implementation.

Some specific challenges organizations may face include:

• Gathering and presenting liquidity information
• Developing methodologies for allocating expenses by function
• Educating board members and other stakeholders about the changes in financial statement presentation

Best practices for adoption include:

1. Start early: Begin the implementation process well in advance of your reporting deadline.
2. Engage with your auditors: Work closely with your auditors to ensure your approach aligns with their expectations.
3. Educate your board and stakeholders: Provide training and resources to help your board and key stakeholders understand the changes.
4. Review and update your financial reporting processes: Use this as an opportunity to improve your overall financial reporting practices.
5. Document your decisions: Keep clear records of how you’ve interpreted and applied the new standards.

Technology plays a crucial role in compliance. Modern accounting software can help streamline the implementation process. Look for solutions that offer features specifically designed to address the new reporting requirements, such as automated functional expense allocation and liquidity reporting tools.

Looking to the Future

FASB continues to monitor the nonprofit sector. Future updates may address emerging issues and challenges. Staying informed about FASB developments is crucial for ongoing compliance.

Some areas that may see future updates include:

• Reporting of gifts-in-kind
• Further refinement of liquidity disclosures
• Guidance on cryptocurrency donations and holdings
• Enhanced reporting on program outcomes and impact

Nonprofits should cultivate a culture of continuous learning and adaptation in their finance teams. Regular training and professional development can help ensure your organization stays ahead of accounting changes.

How Temple Management Consulting Can Help

At Temple Management Consulting, we specialize in nonprofit accounting. 

We offer expert guidance on implementing current standards and best practices. We can help you navigate these changes and ensure your organization’s financial reporting meets new standards.

Don’t let the FASB standards overwhelm you. With the right guidance and tools, you can turn these changes into an opportunity to improve your financial reporting and transparency. The enhanced clarity and comparability offered by these standards can help you better communicate your financial story to donors, grantmakers, and other stakeholders.

At Temple Management Consulting, we’re committed to helping nonprofits thrive in a contemporary accounting landscape. Our deep understanding of both the standards and the unique challenges faced by nonprofits allows us to provide tailored, practical solutions.

Contact Temple Management Consulting today to learn how we can support your nonprofit’s financial success. Let us help you navigate these changes and emerge stronger, more transparent, and better equipped to fulfill your mission.