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CHANGES IN FINANCIAL REPORTING FOR NOT-FOR-PROFITS
Not-for-profit (NFP) accounting and reporting has historically been challenging for many accountants and users of NFP financial statements. NFP organizations operate differently, and thus report differently from their for-profit counterparts, requiring special attention and specific industry knowledge to ensure transparent and meaningful financial information. However, many accountants and users find that certain areas of the current NFP financial reporting framework are often difficult to navigate and interpret. This becomes especially apparent in the board room and at management meetings where financial statement literacy may not always be a core skillset for all members. In an effort to address some of these concerns among users, on Aug. 18, 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-14, Not for Profit Entities (Topic 958): Presentation of Financial Statements of Not-For-Profit Entities.
The current guidance for NFP accounting and reporting dates back to 1993 when the FASB issued statement number 116 (SFAS 116), Accounting for Contributions Received and Contributions Made, and statement number 117 (SFAS 117), Financial Statements of Not-for-Profit Organizations, which at the time represented significant change for NFPs. The intent of these standards was to enhance the relevance, usefulness and comparability of NFP financial statements. Since NFP financial statements are primarily used by donors, members, creditors, and others who provide resources to NFP entities, the goal of the standards was to allow these users to make better assessments concerning how well an organization can continue to provide services, the overall results of operations of the NFP, and the extent to which management discharged their stewardship. One of the key provisions of SFAS 117 introduced the concept of permanently, temporarily and unrestricted net assets in a NFP's financials statement rather than the traditional classification by funding source or group (formerly known as fund accounting).
The new standard is overarching and meant to simplify, and clarify the accounting for NFP entities, as well as increase the transparency of the financial statements for NFP entities. ASU 2016-14 focuses on a few primary areas, including net asset classification and liquidity disclosures. As an exposure draft, the proposed standard had also focused on operating performance measures; however, after the comment period, it was decided that the operating measures will be addressed in Phase 2 of the project. The standard as released will affect substantially all NFPs, as well as creditors, donors, grantors, and others that use their financial statements. NFPs will need to implement the new financial reporting model for fiscal years beginning after Dec. 15, 2017.
Net Asset Classification
Under the SFAS 117, NFP entities were required to report three classes of net assets the face of their statement of financial position based upon the type of donor restriction placed upon a net assets, be it permanent, temporary or unrestricted. These classifications proved to be confusing to some users of NFP financial statements and many times difficult to apply in practice, especially in light of significant changes to endowment laws in recent years. In an effort to simplify, under the proposed new guidance, these three classifications will be replaced with two: net assets with donor restrictions, and net assets without donor restrictions. Further, in response to changes in certain endowment laws which allow for prudent spending of "underwater funds," (i.e.: permanently restricted gifts for which the value has decreased below the amount of the original gift or amount established by law), the "underwater" amount will be now classified as restricted and included with Net assets with donor restrictions, and additional disclosures will be required. Under the current rules, underwater funds are classified as unrestricted. The goal of these changes is to help users make a clearer distinction between those net assets that available for the institutions operations and those that are not.
Statement of Cash Flows
The exposure draft originally required that all NFPs present its statement of cash flows using the direct method; however, that requirement was later retracted such that organizations may now continue to use either the direct or indirect method as set forth under previous guidance. However, to incentivize NFPs to utilize the direct method, the standard eliminates the need to provide a reconciliation of the direct method to the indirect method statement of cash flows when the direct method is presented.
Liquidity and Available Resources
The new ASU focuses on information about an organizations' available resources to enable user to better understand liquidity risk. NFPs will be required to disclose certain qualitative information about how it evaluates its liquidity position and how the entity plans to utilize its available liquid resources to meet cash needs for general expenditures within a year of the date of the statement of financial position. Further, the ASU requires quantitative disclosures of its available liquid resources that are available to meet cash needs for general expenditures within one year of the date of the statement of financial position.
Expenses
The new ASU requires other changes related to the statement of activities that include reporting information about operating expenses by both natural and functional classifications. These may be reported in one of three places, as a separate statement, on the face of the statement of activities, or as a note in the statement of activities. Certain qualitative information discussing the methods used to allocate expenses among program and support functions is also required. Finally, NFP entities will be required to include in the statement of activities, any returns on investments net of direct internal and related external expenses, as defined in the standard.
Phase 2 - Operating Measures, Alignment of Certain Cash Flow Items and Segment Reporting for Healthcare Entities
The proposed ASU exposure draft included amendments to assist users in understanding how an organization's operations are performing. While these amendments are not included in ASU 2016-14 as released, the FASB has decided to address these amendments separately in Phase 2 of the not-for-profit reporting project.
Effective Date
ASU 2016-14 is effective for annual financial statements for fiscal years beginning after Dec. 15, 2017, and for interim periods within fiscal years beginning after Dec. 15, 2018, with early adoption permitted. NFPs presenting comparative financial statements must apply the requirements of this ASU retrospectively, although omission of certain of the amendments is permitted for periods prior to adoption.
Although these changes will require significant effort on the part of NFPs, the FASB's goal is to improve the financial reporting of NFP entities to ensure that users of their financial statement received the most accurate picture of how the NFP is doing fiscally. These new requirements are intended to benefit not only the NFP entity but the users including donors, creditors, and others that otherwise engage in business activities with NFP entities.
For more information, please contact a member of the firm's National Not-For-Profit Practice in Detroit 313 964 1040, Farmington Hills 248 355 1040 or Sterling Heights 586 254 1040, or visit us on the web at www.uhy-us.com.
By Michael Lipschultz, Managing Director
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60-DAY ELECTRONIC NOTICE (FORM 8976) REQUIREMENT FOR NEW IRC �501(c)(4) EXEMPT ORGANIZATIONS
New �501(c)(4) exempt organizations and their advisors need to be mindful of a requirement added to the Code under the PATH Act, enacted Dec. 18, 2015. Under newly-enacted IRC �506 such organizations must electronically submit Form 8976 - Notice of Intent to Operate Under Section 501(c)(4) - within 60 days of formation. This form does not exist on paper and thus will not be found by searching at the IRS website. An individual desiring to electronically submit this form needs to establish an account at the IRS website and pay a user fee of $50 through www.pay.gov. Late filing can be penalized. (Rev. Proc. 2016-41).
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LOWER PROCESSING FEE FOR FORM 1023-EZ
On July 1 the user fee to process the Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, was decreased from $400 to $275 (Rev. Proc. 2016-32).
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INDUSTRY INSIGHT
With the increasing complexity of laws and regulations, it's important for associations, foundations, charities, hospitals, schools and other tax-exempt entities to seek out professionals with extensive experience in nonprofit compliance issues. We understand there are many challenges affecting the industry and provide the attention needed to help clients stay focused on their job at hand.
UHY LLP's National Not-For-Profit Practice offers comprehensive audit and assurance, tax planning and compliance and business advisory services to meet the unique, complex needs of nonprofit organizations.
These types of specialized services, which cut across the traditional service lines, demonstrate our philosophy of skilled professionals integrating industry expertise with technical services.
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Our firm provides the information in this newsletter as tax information and general business or economic information or analysis for educational purposes, and none of the information contained herein is intended to serve as a solicitation of any service or product. This information does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisors. Before making any decision or taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
UHY LLP is a licensed independent CPA firm that performs attest services in an alternative practice structure with UHY Advisors, Inc. and its subsidiary entities. UHY Advisors, Inc. provides tax and business consulting services through wholly owned subsidiary entities that operate under the name of "UHY Advisors." UHY Advisors, Inc. and its subsidiary entities are not licensed CPA firms. UHY LLP and UHY Advisors, Inc. are U.S. members of Urbach Hacker Young International Limited, a UK company, and form part of the international UHY network of legally independent accounting and consulting firms. "UHY" is the brand name for the UHY international network. Any services described herein are provided by UHY LLP and/or UHY Advisors (as the case may be) and not by UHY or any other member firm of UHY. Neither UHY nor any member of UHY has any liability for services provided by other members.
�2016 UHY LLP. All rights reserved. [0115]
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