Accounting Standards Update (ASU) 2016-14, Presentation of Financial Statements of Not-for-Profit Entities (Topic 958), issued August 18, 2016 by the Financial Accounting Standards Board (FASB), includes several changes including:
Improvements to the presentation and disclosures for net assets classes from the previous three classes of net assets (unrestricted, temporarily restricted, and permanently restricted) to two classes (without donor restrictions and with donor restrictions)
- Allowing free choice between the direct method and indirect method in presenting cash flows
- Enhancements to information provided about the liquidity and availability of financial resources
- Augmenting disclosures on underwater endowment funds
- Unifying the reporting of investment returns.
- Providing better information about functional expenses and disclosures about how expenses are allocated to management and general
The ASU requires reporting of expenses by both nature and function in one location, either on the face of the statement of activities, as a schedule in the notes to the financial statements, or in a separate functional expense statement. The relationship between functional classification and natural classification for all expenses shall be presented in an analysis that disaggregates functional expense classifications, such as program, management, and fundraising activities by their natural expense classifications, such as salaries, rent, utilities, supplies, interest, depreciation, grant awarded to others, and professional fees. The function explains the purpose of the expense category where the nature provides what the money was spent on.
The new NFP standard also requires that nonprofits disclose the cost allocation methods used to allocate indirect costs, those costs attributable to one or more program or support functions. Indirect costs can be allocated using a variety of methods. Depreciation of a building could be allocated based on the square footage. Personnel salary and benefit costs could be allocated based on an estimate of time and effort. Support functions like information technology or communication could be allocated based on estimates of time and costs of specific technology. Supplies could be allocated based on specific use. Other support functions might be allocated by a percentage of direct costs.
The goal of this new ASU is to provide more useful information to the users of nonprofit financial statements to understand the relationship of functional expenses and the cost allocation methods used by the nonprofit. The ASU is effective for periods beginning after December 15, 2017. Nonprofits should prepare now for the new requirements of this standard. Review your financial statements and determine if your organization is ready to report your expenditures by both natural and functional classifications. Consider the various indirect cost allocation methods that your organization currently uses and how to provide disclosure of those different methods.