Non-profit organizations finally received the much-awaited update on financial reporting from the Financial Accounting Standards Board (FASB) on August 18, 2016. Bearing the official designation, ASU No. 2016-14, this update which is the result of hard work involving research, analysis and debate spread over a four year period, “…simplifies and improves the face of the financial statements and enhances the disclosures in the notes” according to the FASB Chairman, Russell Golden. Probably long overdue as the existing guidelines have been in use since 1993, this update will help Not-for-profits (NFPs) better tell their stories to stakeholders by providing more detailed information.
WHAT IS REALLY DIFFERENT?
1. Reduction in Number of Net Asset Classes: Hitherto, there were three net asset classes but under the new update, there are just two;
a) Net Assets with donor restrictions, and
b) Net assets without donor restrictions
2. Inclusion of All NFPs: While the 501c3, 501c4 and 501c6 are the most prominent classifications, all NFPs types are required to follow the guideline.
IS IT REALLY AN IMPROVEMENT ON THE PREVIOUS GUIDELINE?
Experts argue that improvements are evident in the new guideline and these include the following:
1. Enhanced transparency in the procedures for reporting financial measures
2. Cash flow presentation made far simpler
3. Expenses can now be reported with more consistency using the function and nature categorizations
4. Classification of net asset declaration now follows a less complicated procedure
ADVANTAGES OF THE NEW GUIDELINE
The information being presented under the new guideline is definitely of more value to the NFPs. Board designation policies are also to be streamlined, allowing for better corporate governance.
DISADVANTAGES OF THE NEW GUIDELINE
The enhanced disclosure measures could also work adversely as an NFP that looks too financially buoyant may not be able to attract more donor funds. However, since the objective is to enable NFPs to tell their stories better, this could still be used to their advantage. Additionally, the new requirement for presenting expenses by natural and functional categories will take more time and effort.
The ASU 2016-14 is effective as of December 15, 2017, and the FASB has promised another phase of updates although no timeline has been revealed about that. As these are legal requirements, getting to work with the appropriate professional is the prudent step for NFPs. In the final analysis, the FASB desires to enhance financial communications between NFPs and their stakeholders.
Knowing the ins and outs of FASB updates and changes is essential for any business but especially non profitsto gaurantee your organization is providing all the proper documentation required and needed by law.
For more information on hiring an expert to ensure proper financial records click here!
