What Churches Need to Know

The FASB Financial Reporting Standards Changes 

Published in INSIGHT - Winter 2016

By Fran Brown, CPA

In August of 2016, the Financial Accounting Standards Board (FASB) issued the first of a few major revisions to financial reporting for not-for-profit entities – including churches. Accounting Standards Update (ASU) 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities is the first substantive update to not-for-profit financial reporting since FAS 116 and 117 in 1993.

For many churches, the impact will be less substantial than at other types of nonprofit entities. Two of the more significant aspects of the changes deal with reporting on restricted net assets and “underwater” endowments. Below, we explain these and other key reporting changes churches need to be aware of and begin planning for.

Restricted Net Assets

Many churches have long tried to minimize the acceptance of permanently restricted net assets and will often only have unrestricted and temporarily restricted net assets. Under the new standards, nonprofits will only report on net assets with restrictions (temporarily and permanently restricted) and net assets without restrictions (unrestricted).
 
The day-to-day accounting treatment for net assets is unchanged, as are the laws surrounding the use and protection of the assets. The only change is the reporting. Going forward, temporarily restricted and permanently restricted net assets will be combined for financial statement reporting purposes.

Net assets that are for the acquisition or construction of long-lived assets (i.e., property, plant and equipment) will be required to be released from restrictions when the asset is placed in service. For example, if a church is conducting a capital campaign, the full amount received will be released from restriction when the building is completed and placed in service – not when the funds are used to construct the building or when the pledges are collected.

“Underwater” Endowments

“Underwater” endowments – those endowment funds that have depreciated in value – have been shown as offsets to unrestricted net assets. Under the new standards, these will stay within the “Net Assets with restrictions” category. This will affect larger churches and denominations more than most local churches.

Expense Reporting 

A big change impacting all nonprofits, however, is expense reporting. Until now, churches and other nonprofits reported expenses in broad categories such as worship, program, and administrative. The new standards will require disclosure of expenses by function and by natural classification. In addition, the organization will need to disclose the methods used to allocate expenses among program and support functions.

Required Disclosures

Many churches operate on a calendar year-end, and their statements of financial position are relatively healthy at the end of the year thanks to charitable giving increases in December. For churches with other year-ends, there may be times when the statement of financial position appears to be less healthy. One of the new disclosures will require qualitative information on how the church will manage its liquidity risk – in other words, how the church will meet its current obligations within one year. This new disclosure should provide meaningful information on how the church will meet current obligations regardless of the appearance of health on the face of the statement of financial position.

Additional changes include disclosures around investment return and the related expenses, cash flow reporting options, and disclosures around reporting when using an operating measure (which is not typical in a church report). 

When the Changes Take Effect

These new changes will be in effect for fiscal years beginning after December 15, 2017. If you are a calendar year-end church, your first fiscal year beginning after December 15, 2017 is January 1, 2018. Early adoption is permitted.
 
When implemented, the new reporting and disclosures will apply retrospectively to all years presented. Churches and other nonprofits can present a one-year statement in the first year of adoption, especially if they do not have to have comparative statements. Early adoption is permitted.

It is important to begin planning for these changes now. Please seek guidance from your CPA as there will be additional internal costs as well as additional audit costs associated with these changes.


Fran Brown is partner and professional practice leader - Attest  at CapinCrouse LLP
His expertise includes strategic planning, budgeting, financial statement preparation, exempt-organization tax filing, real property sales and leases, board training, and enterprise risk management (ERM) training. He can be reached at fbrown@capincrouse.com