FASB Update: Implementing the New Financial Statement Presentation Standard Practical Considerations
With the Financial Accounting Standards Board’s issuance of ASU 2016-14, Presentation of Financial Statements of Not-for-Profit Entities, non-profits have several new considerations to take into account.
In Summary – the Key Changes in ASU 2016-14
ASU 2016-14 implements the following reporting changes:
- Reduces net asset classes from three to two.
- New liquidity and availability disclosures are required.
- The reporting of expenses by nature and function is required along with a description of the methods used to allocate costs among functional categories.
- Requires non-profits to report investment return net of all external and direct internal investment expenses.
- Requires additional disclosures for underwater endowments.
- Allows for the elimination of the reconciliation of change in net assets to cash flows from (used for) operating activities when using the direct method statement of cash flows.
- Requires a placed-in-service approach for reporting expirations of restrictions on gifts of cash or other assets to be used to acquire or construct a long-lived asset.
- There are now expanded disclosures for net assets, including board-designated net assets.
Reduction of Net Asset Classes From Three To Two
In the new standard, unrestricted net assets become net assets without donor restriction (includes board designated). Temporarily and permanently restricted net assets are now combined to become net assets with donor restriction.
Net Assets Disclosure Requirements
In the new standard, the disclosure requirements include the composition of net assets with donor restrictions along with an emphasis on how/when resources can be used (purpose, time, perpetual). The new disclosure requirements require quantitative and qualitative information about board designations. These expanded disclosures require:
- Amounts and purposes of board designations.
- Similar actions resulting in self-imposed limits on the use of resources without donor-imposed restrictions.
- Documented policies and procedures on the establishment of board designations, amounts, and how such board-designated net assets may be released from designation.
Regarding the reporting of the expiration of the restriction of gifts related to long-lived assets, non-profits previously were allowed for recognition when the asset was acquired and placed in service on ratable amounts over the asset’s estimated useful life. Under the new standard, organizations are no longer allowed to choose as a placed-in service approach is now required. The impact of this is a reclassification of net assets to reflect the decrease in net assets with donor restriction and increase in net assets without donor restrictions.
How to Implement the New Net Asset Requirements: To implement this requirement, non-profits should determine if they want to show the various components of net assets without donor restrictions or of with donor restrictions on the face of the financial statements or in the notes to the financial statements. Examples of net assets without donor restrictions are undesignated, designated by the Board for XXX purposes, and investment in property and equipment. Examples of net assets with donor restrictions are perpetual in nature, purpose restrictions, and time-restricted for future periods.
Under the new standard, non-profits much disclose their abilityto spend from underwater endowment funds. They must also disclose their policy and any actions taken during the period concerning the appropriation from underwater endowment funds. Non-profits must disclose the following in the aggregate, for all underwater endowment funds:
- Fair value of the underwater endowment funds (1)
- The original endowment gift amounts (or the level required to be maintained by donor stipulations or by law that extends donor restrictions) (2)
- The amount by which the original gift amount exceeds the fair values (the deficiency = 2 less 1)
How to Implement the Underwater Endowment Requirements: If your non-profit holds underwater endowments, you will need to disclose the following:
- Your interpretation of the organization’s ability to spend from underwater endowments
- The organization’s policy and actions taken during the period concerning appropriation from underwater endowment funds
- For each period presented, in the aggregate, for all underwater endowment funds: present the fair value, the original endowment gift, and the amount by which the original gift exceeds the fair value.
Listed below are two sample endowment disclosures:
From time to time, the fair value of assets associated with donor-restricted endowment funds may fall below the level the Company is required to retain by donor stipulation or law (underwater endowments). There were no underwater endowments as of December 31, 20XX.
From time to time, the fair value of assets associated with donor-restricted endowment funds may fall below the level the Company is required to retain by donor stipulation or by law (underwater endowments). We have interpreted state law to permit spending from underwater endowments in accordance with prudent measures required under law.At December 31, 20XX, funds with original gift values of $4,189,234, fair values of $4,123,890, and deficiencies of $65,344 were reported in net assets with donor restrictions. These amounts were fully recovered during YYYY due to favorable market conditions.
The new standard requires the non-profit to report the investment return net of all external and direct internal investment expenses. Internal expenses include the direct conduct or direct supervision of the strategic and tactical activities involved in generating investment return. These expenses include salaries, benefits, travel, and other costs associated with staff responsible for development and execution of investment strategy, including supervision, selecting and monitoring external managers. Non-profits are also no longer required to disclose the components of netted expenses.
How to Implement the Investment Return Requirements: If your organization has direct or indirect investment expenses that should be netted against investment return, you should determine the amount of external and direct internal investment management and custodial expenses. Internal investment management is defined as the direct conduct or direct supervision of the strategic and tactical activities involved in generating investment return. This excludes costs not associated with generating investment return.
Liquidity and Availability
Under the new standard, non-profits must disclose qualitative information on how the organization manages its liquid resources available to meet cash needs for general expenditures within one year of the balance sheet date. Also, quantitative information that communicates the availability of financial assets at the balance sheet date to meet cash needs for general expenditures within one year of the balance sheet date is required to be disclosed.
How to Implement the Liquidity and Availability Requirements: You should determine how your organization manages its liquid resources available to meet cash needs for general expenditures within one year of the balance sheet date, both quantitatively and qualitatively. For quantitative assessment, determine which items on the balance sheet does management define as available liquid resources. Consider restrictions and designations limiting use. Provide a calculation. You should also determine what method will be used in the format of the quantitative portion. Display gross amounts of financial assets then adjustments to arrive at available for expenditure amounts. Display only the net amounts available for expenditure. For qualitative assessment assess: how is excess cash handled, is there an operating reserve, or is there a line of credit available?
Under the new standard, non-profits, including voluntary health and welfare entities, must present an analysis of expenses by function and nature in one location:
- Separate statement of functional expenses
- Table in the notes
- Incorporate into the statement of activities
Include a description of the method(s) used to allocate costs among program and support functions.
Management and general expenses are defined as:
- Business management and budgeting
- General accounting, payroll, and annual reporting
- Financing, including unallocated interest costs
- Billing and collecting fees
- Human Resources
- All other management and administration except for the direct conduct or direct supervision of program services, fundraising activities, or membership development activities
When should management and general expenses (M&G) be allocated:
- IT - benefits various functions and generally would be allocated
- CEO - could be allocated to program, fundraising, M&G
- CFO - could be allocated to M&G and investment expense
- HR - generally would assign all to M&G
- Grant Accounting and Reporting - program reports would be program (grant-related) but financial reports and related accounting would be M&G
Listed below is a sample disclosure related to allocated costs:
The financial statements of NFP B report certain categories of expenses that are attributable to more than one program or supporting function. Therefore, these expenses require allocation on a reasonable basis that is consistently applied. The expenses that are allocated include depreciation and occupancy costs, which are both allocated on a square footage basis, as well as salaries and benefits, which are allocated on the basis of time and effort studies.
How to Implement Expense Reporting Requirements: To implement these new requirements, non-profits can disclose expenses as a separate statement of functional expenses, a table in the notes, or incorporate them into the statement of activities. Develop a comprehensive description of the method(s) used to allocate costs among program and support functions if the organization's footnotes do not currently include disclosure. If you have not reviewed the expanded guidance on management and general expenses included in the financial reporting standard, analyze the amounts currently being charged to management and general expenses and determine propriety.
Statement of Cash Flows
Under the new standard, the use of the direct or indirect method is allowed. Non-profits are no longer required to show the reconciliation of change in net assets to cash flows from operating activities if using the direct method.
What if Your Non-Profit Issues Comparative Financial Statements?
All of the provisions listed above are still applicable, except that you have the option to choose not to present expenses by nature and function (unless the current guidance already requires it) and disclosures regarding liquidity.
Is Your Organization Ready
to adopt the New Standard?
Apply all provisions of the new ASU:
- Apply all provisions for comparative presentation except:
- Analysis of expenses by nature and function (except for Voluntary Health and Welfare Entities that are required under current GAAP to present Statement of Functional Expenses), and/or
- Disclosures around liquidity and availability of resources
-Disclose the nature of any re-classifications or restatements and their effects, if any, on changes in the net asset classes for each period presented.
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