Implementation Tips – New Reporting Requirements for Not-for-Profit Entities
The effective date for ASU 2016-14: Presentation of Financial Statements of Not-for-Profit Entities is for fiscal years beginning after December 15, 2017.
The following summarizes some of the key provisions of the ASU and provides some implementation considerations.
Classes of Net Assets
- Under the new standard, not-for-profit entities (NFPs) will replace the three classes of net assets currently presented in the financial statements (unrestricted, temporarily restricted, and permanently restricted) with two classes of net assets (net assets with donor restrictions and net assets without donor restrictions).
- As there was no real change in the definition of what a donor-imposed restriction is with this ASU, the effect of this change will generally be that temporarily restricted net assets and permanently restricted net assets under current GAAP are combined to become one class called net assets with donor restrictions. Unrestricted net assets under current GAAP will be referred to as net assets without donor restrictions.
- The two classes of net assets will be presented on the face of the statement of financial position along with the currently required amount for total net assets.
- The amount of the change in each of the two classes of net assets will be presented on the statement of activities, along with the currently required amount for the change in total net assets.
- NFPs will continue to be required to disclose the composition of donor restricted net assets at the end of the period, but will also need to disclose how the restrictions affect the use of resources (i.e. time restricted resources, resources restricted for a specific purpose, etc.).
- Additionally, NFPs will be required to disclose the amounts and purposes of governing board designations, appropriations, and similar actions that result in self-imposed limits on the use of resources without donor-imposed restrictions as of the end of the period.
- There are additional considerations and disclosure requirements for underwater endowment funds.
Implementation Considerations – Net Assets
- For internal tracking, continue to track net assets with permanent restrictions separately from net assets with temporary restrictions, as disclosure will be required.
- Continue tracking net asset restrictions by nature of restriction for disclosure purposes.
- On the Statement of Financial Position update unrestricted net assets to be net assets without donor restrictions and combine temporarily restricted net assets and permanently restricted net assets and update to be called net assets with donor restrictions.
- Review current financial statement disclosures and ensure board designated and donor-restricted endowments include the following in the financial statement disclosures:
- Description of the governing board’s interpretations of the law(s) underlying how the organization determines the net asset classification of donor-restricted endowment funds.
- A description of the organization’s investment policies for endowment funds, including:
- Return objectives and risk parameters.
- How the return objectives relate to the spending policies for the funds.
- The strategies employed for achieving the return objectives.
- A description of the organization’s policies for making appropriations for expenditures from endowment funds (i.e., the organization’s endowment spending policies), including its policies for making appropriations for expenditures from underwater endowment funds.
- The composition of the organization’s endowment by net asset class at the end of the period, in total and by type of endowment fund, showing donor-restricted endowment funds separately from board-designated endowment funds.
- Update current written accounting policies and procedures for change in terminology and any change in tracking needed to meet new requirements.
Enhanced Disclosures on Liquidity and Availability of Resources
- NFPs will still be required to provide information about the liquidity of assets or the maturity of liabilities, including the effects of restrictions and self-imposed limits, by:
- Sequencing assets according to their nearness of conversion to cash and liabilities according to their nearness of use of cash due to maturity
- Classifying assets and liabilities as current and noncurrent
- Disclosing any additional relevant information about the liquidity or maturity of assets and liabilitiesNFPs will still be required to provide information about the liquidity of assets or the maturity of liabilities, including the effects of restrictions and self-imposed limits, by:
- NFPs will be required to disclose quantitative and qualitative information on how its liquid resources are managed. Requirements include:
- Qualitative information that communicates how an NFP manages its liquid resources available to meet cash needs for general expenditures for the next year.
- Quantitative information, either on the face of the balance sheet or in the notes, and additional qualitative information in the footnotes as needed, that communicates the availability of an NFP’s financial assets at the balance sheet date to meet cash needs for general expenditures within one year of the balance sheet date. Availability of a financial asset may be affected by:
- Its nature,
- External limits imposed by donors, grantors, laws, and contracts with others,
- Internal limits imposed by governing board decisions.
- ASU 2016-14 doesn’t provide specific details as to the types of qualitative or quantitative information to include. However, it includes examples of notes that meet the requirements. Those examples include qualitative disclosures about the following:
- The organization’s responsibility to maintain resources to meet donor-imposed restrictions, which makes those resources unavailable for general expenditures
- The organization’s goals for maintaining financial assets
- The organization’s policies for investing excess cash
- The organization’s policies for spending from board-designated endowment funds
- Contractual agreements that restrict certain financial assets and/or make them unavailable to fund general expenditures
- Information on access to lines of credit that could be utilized in the case of a financial short-fall
- In the first year ASU 2016-14 is adopted, organizations are not required to present the qualitative and quantitative information for prior comparative periods about how the organization manages its liquid resources to meet cash needs for general expenditures within one year of the date of the statement of financial position and whether its financial assets are available to meet those cash needs. However, liquidity information required by existing standards must be included for the comparative period(s).
Implementation Considerations – Liquidity and Availability of Resources
- Consider updating format of the statement of financial position to be in a classified format, if not already presented in classified format.
- Determine organization’s goal for liquidity and develop policy for meeting expenditure needs or review current policy if one is already in place.
- Develop investment policy or review current policy if one is already in place.
- Develop spending policy with respect to board-designated funds or review current spending policy if one is already in place.
- Draft disclosures to meet the requirements of the ASU. The disclosure needs to address the following:
- Disclosure of the access to liquid assets (can be part of statement of financial position presentation)
- The organization’s goal for liquidity/ensuring expenditure needs are met
- The organization’s policy for investing excess cash
- The organization’s policy for spending from board-designated funds
- If there are any restrictions/limitations on the use of the liquid assets
- See the ASU for some examples.
- All NFPs will be required to present expenses by both their natural classification and their functional classification. Under current GAAP, this is only required for voluntary health and welfare entities. The analysis of expenses is to be provided in one location, which could be on the face of the statement of activities, as a separate statement, or in notes to financial statements.
- Additionally, NFPs will be required to include a description of the method(s) used to allocate costs among program and support functions.
- In the first year that ASU 2016-14 is adopted, an organization that has not previously reported functional expenses has the option to omit the analysis of expenses by both functional expense classification and natural expense classification for any comparative prior years presented. Organizations that choose not to present the analysis for the comparative prior years must present a separate presentation of expenses by functional classification and expenses by natural classification.
Implementation Considerations – Functional Expenses
- Develop and document methodology for allocation of costs among program and support functions or review current methodology if already in place.
- If not already presented, develop a statement of functional expenses that presents expenses by natural expense classification and by nature and function (program, administrative and fundraising). One starting place may be the Form 990, Part IX.
- If not already disclosed, draft the financial statement disclosure outlining the organization’s methodology for allocation of costs among program and support functions.
Release Restrictions on Capital Assets
- The new standard requires NFPs to use, in the absence of explicit donor conditions, the placed-in-service approach for reporting expirations of restrictions on gifts of long-lived assets, cash or other assets to be used to acquire or construct a long-lived assets, and reclassify any amounts from net assets with donor restrictions to net assets without donor restrictions for such long-lived assets that have been placed in service as of the beginning of the period of adoption.
- This eliminates the current option NFPs have to adopt an accounting policy to release the donor-imposed restrictions over the estimated useful life of the donated asset.
Implementation Considerations – Release Restrictions on Capital Assets
- Determine if the organization has any long-lived assets, cash or other assets to be used to acquire or construct long-lived assets with implied (not explicit) time restrictions.
- For any long-lived assets without explicit donor restrictions that have been placed in service, the organization must retroactively reclassify those net assets to net assets without donor restrictions.
- Update the organization’s written accounting policies for the treatment of donated long-lived assets with implied (not explicit) time restrictions.
Presentation of the Statement of Cash Flows
- NFPs will still be permitted to choose either the direct or indirect method for reporting operating cash flows. However, when the direct method is used, NFPs will no longer be required to present or disclose the additional indirect reconciliation that current GAAP necessitates.
Implementation Considerations – Presentation of Statement of Cash Flows
- If the organization has been reporting operating cash flows under the direct method, the organization may remove from its financial statements, the indirect method reconciliation if desired.
- Under the new standard, NFPs will report investment return net of external and direct internal investment expenses and will no longer be required to disclose those netted expenses.
- ASU 2016-14 distinguishes between programmatic investing (making investments that are directed at carrying out the organization’s mission) and total return investing (making investments for the production of income and capital gains). Only the investment expenses of total return investing are netted against the related investment return on the statement of activities.
Implementation Considerations – Investment Return
- Ensure the investment income (return) presented on the organization’s financial statements is net of related expenses.
- Such investment expenses should not be presented in the organization’s statement of functional expenses.
- Disclosure of such expenses is no longer required.
The information provided above is meant to be a resource for organizations as they implement ASU 2016-14 and includes some common implementation considerations. There may be additional implementation considerations applicable to your organization. Consult the FASB ASU for further information.
Financial Accounting Standards Board: http://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176168381847&acceptedDisclaimer=true
AICPA Not-for-Profit Section: http://www.aicpa.org/InterestAreas/NotForProfit/Pages/default.aspx