The most significant change resulting from ASU 2016-14 impacts the face of nonprofit financial statements by requiring organizations to present two net asset classes rather than three net asset classes. Continuing with our four-part series on ASU 2016-14, Presentation of Financial Statements of Not-for-Profit Entities, this article highlights the changes to net asset classifications and the FASB’s attempt to reduce the complexity and improve the overall understandability of nonprofit financial statements.
ASU 2016-14 simplifies the previous three classifications of net assets by requiring organizations to present two net asset classifications. To help reduce complexity, the three previous classifications: unrestricted, temporarily restricted, and permanently restricted net assets are now required to be presented in two broader net asset classes: net assets with donor restrictions and net assets without donor restrictions. Although distinguishing between net assets with and without donor restrictions is relatively straightforward, this distinction is important as donor stipulations will be the only factor in determining how net assets are classified. ASU 2016-14 does not change current guidance as management, the board, or another governing body will not be able to designate the classification of a gift as donor-restricted. Additionally, a board-designated endowment is required to be presented in net assets without donor restrictions.
This new, two net asset requirement represents the minimum disaggregation required to be presented in the statement of financial position. An organization may choose to further disaggregate its net assets into additional subclasses if deemed beneficial to the readers of the financial statements.
Nonprofit organizations have some flexibility in the presentation of net assets on the statement of activities so long as the requirements of ASU 2016-14 are met. Financial information may be presented in a single column, in multiple columns or in two separate statements. An organization should choose the presentation determined most useful to the users of the financial statements.
The classification of net assets, although arguably the most significant, is just one component of this change. In October, we will conclude our four-part series on ASU 2016-14 and discuss updates to reporting requirements for functional expenses.
Nonprofit organizations are required to adopt the changes for fiscal years beginning after December 15, 2017.
For general questions or additional support about implementation, feel free to contact Kristi Yanover, Audit Partner, at firstname.lastname@example.org, or any member of our Accounting & Assurance Team.