After December 15, 2017 the Accounting Standards Update (ASU) 2016-14, Presentation of Financial Statements of Not-for-Profit Entities, will significantly affect how nonprofits communicate with stakeholders through changes to financial statement presentation and disclosures. These changes include net asset classifications and disclosures, reporting of expenses, reporting of investment returns, and liquidity and availability of resources. In this article we focus on the changes to Net Assets.
Net Asset Classifications
The most significant change resulting from ASU 2016-14 will require entities to present two net asset classes (net assets with donor restrictions and net assets without donor restrictions) rather than three net asset classes (unrestricted, temporarily restricted, and permanently restricted). Net assets with donor restrictions represent donor stipulated contributions, while net assets without donor restrictions represents asset with no donor stipulations. The statement of activities will now be broken out by activities without donor restriction and with donor restrictions.
Net Asset Disclosures
The new net asset classification system does not eliminate the requirement to disclose the various types of donor imposed restrictions. NFPs can now report separate line items within net assets with donor restrictions, or in the note to the financial statements, to distinguish between the types of donor imposed restrictions. Additionally, NFPs will be required to disclose information about the nature and amounts of different types of restrictions that can impact how and when, if ever, the donor-restricted net asset can be used. The new standard will also require disclosures about the amounts and purposes of board designations of net assets without donor restrictions.
Under the new guidance, if donors contribute funds with stipulations that resources be invested either for a long, specified period or in perpetuity, these funds will be considered donor restricted endowment funds and will be reported within net assets with donor restrictions. If a governing body designates portions of net assets without donor restrictions to be invested for a generally long, but not necessarily specified period, these funds will be considered board-designated endowments funds and will be reported under net assets without donor restrictions.
An “Underwater Endowment Fund” is a donor-restricted fund whose value has fallen below the amount required by the donor. Current guidance requires accumulated losses to be reflected as a reduction in unrestricted net assets to present the fund at the amount required by the donor. The new standard will change this presentation and require accumulated losses to be included together with the related fund in net assets with donor restriction. The standard will now require enhanced disclosures including:
- the governing board’s interpretation of relevant state UPMIFA laws as to its ability to spend from underwater endowment funds,
- the NFP’s policy and any actions taken during the period concerning the appropriation of underwater endowment funds,
- the aggregate amounts of fair value of underwater endowment funds,
- original endowment gift or levels required to be maintained by donor stipulation or law,
- amount of the fund’s deficiencies.
How can I prepare?
While these changes may seem daunting, there are several steps you can take to be more prepared:
- Call your CPA and ask what changes might affect your NFP and possible policies and procedures that can be put into place.
- Revise existing accounting and financials reporting policies and procedures, including ensuring that the organization documents its functional expenses allocation methodology.
- Identify board designations and appropriations.
- Consider changes to existing general ledger accounts.
- Identify underwater endowments.
- Modify financial reporting templates.
- Draft new financial statement disclosures to identify additional information that new disclosures may require.
- Consider whether any changes in the financial statements will trigger necessary changes to debt covenants or grant requirements.