Appelrouth Farah & Co. Sees Biggest Update in 20 Years for Not-For-Profit Reporting

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Appelrouth Farah & Co., a full service accounting and business advisory firm, comments on the Financial Accounting Standards Board (FASB) long-awaited Accounting Standard Update (ASU) 2016-14, Presentation of Financial Statements of Not-for Profit Entities, that represents the most significant change in reporting for not-for-profits (NFPs) in two decades.

Appelrouth Farah & Co.
These fundamental changes for not-for-profit reporting are designed to make financial statements more user-friendly.

The Financial Accounting Standards Board (FASB) issued a long-awaited Accounting Standard Update (ASU) 2016-14, Presentation of Financial Statements of Not-for-Profit Entities, that represents the most significant change in reporting for not-for-profits (NFPs) in two decades.

The update represents the first phase of a process by the FASB to make improvements to existing complexities in financial reporting and to provide more useful information to stakeholders including donors, grantors and other users of NFP financial statements.

"These fundamental changes for not-for-profit reporting are designed to make financial statements more user-friendly," said Joshua S. Rader, Director of Audit & Assurance Services for Appelrouth Farah & Co. "The improvements will provide more useful information to stakeholders including donors, and grantors. We are advising our not-for-profit clients about this update and the potential impact on their organizations," added Nicolas De La Vega, Assurance and Advisory Manager for Appelrouth Farah & Co.

The main provisions of the update include the following changes:

Presentation of Net Assets Classifications
A change from the currently required three classes of net assets (unrestricted, temporarily restricted and permanently restricted) to two classes presented as net assets with donor restrictions and net assets without donor restrictions. The change is intended to reduce complexity on the face of financial statements and to provide more useful information through enhanced disclosures.

Elimination of Indirect Reconciliation of Operating Cash Flows
NFP’s will continue to have the option of presenting cash flows using either the direct or indirect method, but will not have to present or disclose the indirect method reconciliation if the direct method is used.

Enhanced Disclosures
NFP’s will be required to include quantitative and qualitative information about exposure to risk, management of liquidity risk, and management of liquid resources available to meet cash needs for general expenditures within one year of statement of financial position date.

Board-designated net assets will now be required to disclose amounts and purposes that result in self-imposed limits, in regards to the use of resources without donor-imposed restrictions. Also, when releasing restrictions related to long-lived assets, NFP’s will be required to use the placed-in-service approach. The option to release donor-imposed restriction over estimated useful life of asset is not longer permitted.

Presentation of expenses by both function and natural classification. Analysis can be presented on the face of the statement of activities, as a separate statement, or in the notes to financial statements. In addition, analysis should include cost allocation methods for program and support functions.

Classification of Underwater Endowments
The classification of underwater endowments will be changed to net assets with donor restrictions, instead of its current classification in unrestricted net assets. Additional disclosures are required which include information regarding the NFP’s policy.

Investment Expense Presentation    
The reporting of investment returns will now be shown net of external and direct internal investment expenses on the face of the statement of activities. Disclosure of netted expenses is not required. The net presentation is intended to provide greater comparability of investment returns across all NFP’s regardless of how their investment funds are managed.

The adoption of ASU 2016-14 will be effective for annual financial statements issued for fiscal years beginning after December 15, 2017, and for interim periods with fiscal years beginning after December 15, 2018. The new provisions should be applied on a retrospective basis. Early implementation is permitted.

Phase two of the update is expected to address additional issues regarding operating measures. It will include the requirement of intermediate measures, definition and inclusion of measures, as well as presentation in statement of activities with measures of operations in statement of cash flows. There is no expected completion date as of yet.

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About: Appelrouth Farah & Co. is a full service accounting and international business advisory firm specializing in auditing, domestic and international taxation, litigation support, forensic accounting, fraud examination, business valuation and family office. Stewart L. Appelrouth and Carlos M. Farah founded the firm in 1985. The firm’s partners and professionals have experience in many areas of accounting and tax typically found only in national accounting firms. Visit appelrouth.com for more information.

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