2/11/2019

Accounting for Endowments: What You Need to KnowFebruary 12, 2019

To Receive CPE Credit• Individuals

• Participate in entire webinar

• Answer polls when they are provided

• Groups• Group leader is the person who registered & logged on to the webinar• Answer polls when they are provided• Complete group attendance form • Group leader sign bottom of form• Submit group attendance form to training@bkd.com within 24 hours of webinar

• If all eligibility requirements are met, each participant will be emailed their CPE certificate within 15 business days of webinar

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Presenters

Neely DuncanPartnerndduncan@bkd.com

Emily GeorgeSenior Managing Consultantegeorge@bkd.com

Danika MendrygalAttorneydanika@mendrygallaw.com

Sara GrenierDirectorsgrenier@bkd.com

Endowment Risk Management & Legal Structure

Endowment Policy Considerations

Understanding Endowments

Today’s Topics

Investments

Financial Statements from ASU 2016-14: Statement of Financial Position

NFP Reporting Standard Impact on Endowments & Investments

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Today’s Topics

Endowment Disclosure Requirements

Underwater Endowment Fund Changes

Financial Statements from ASU 2016-14: Statement of Activities & Changes in Net Assets

Board & Management Designations/ Appropriations & Enhanced Disclosure Requirements

Net Asset Requirements for Presentation & Enhanced Disclosure Requirements

Liquidity Disclosure Requirements

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Understanding Endowments

2/11/2019

Accountants & lawyers speak the same language

Common Myth:

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General Types of Endowments› Perpetual type of endowment› Term endowment› Quasi-endowment – Board-designated endowments

› Board-designated (reserves, rainy day funds, capital campaigns)• These are NOT endowments, they are different• Therefore, NOT included in the enhanced endowment disclosures• But, they are required to be considered for the impact to liquidity

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UPMIFA Legal Definition (As Adopted by Texas) – Endowment Fund› “Institutional fund” – a fund held by an institution exclusively for charitable purposes

› “Institution” includes

• A person (other than an individual) organized & operated exclusively for charitable purposes

• A government or governmental subdivision, agency or instrumentality, to the extent it holds funds exclusively for charitable purposes

• A trust that had both charitable & noncharitable interests, after all noncharitable interests have expired

› “Endowment fund” – an institutional fund (or part thereof) that, under the terms of a gift instrument, is not wholly expendable by the institution on a current basis

• Does not include board-designated endowments since there is no gift instrument

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Investment Management Code of Conduct (CFA Institute)› Act with loyalty & proper purpose

› Act with skill, competence, prudence & reasonable care

› Abide by all laws, rules, regulations & founding documents

› Show respect for all stakeholders

› Review investment strategy & practices regularly

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Endowment Risk Management & Legal Structure

Endowment Risk Management› Endowments impose upon the organization

• Contractual • Legal • Ethical • Financial • Management • Reporting responsibilities

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Regulatory/Legal Framework –Restricted Gifts › General Tips

• New endowment set up• Structure & options for endowments• Hurdles & leadership decision making

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› Structural options• Separate 501(c)(3)

› “Stand-alone” public charity› Private foundation› Supporting organization

› Legal & governance implications of structure› Other implications of structure › Related considerations

• Control by operating nonprofit

Endowment Structure

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› Reputational risk

› Donor relations

› Change in culture or values over time

› Change in circumstances

› Conflicts of interest

› Donor actions/reputation

› Donor default on payment› Restrictions or requirements the

charity cannot handle› Lack of clarity around provisions› State regulatory enforcement› Private donor enforcement (or

attempts)› Charitable pledges

What Can Go Wrong?

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Regulatory/Legal Framework –Restricted Gifts

Federal/IRS• Completed gift• Charitable deduction/Quid pro quo rules• Conditional “get it back” restrictions• Impact on 501(c)(3) status/Private

benefit• Private foundation rules, i.e., self-

dealing

State• Donor intent• UPMIFA• Attorney General/Charities Bureau• Other issues• Private litigation

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› Acceptance – when & how

› Applicable approval thresholds

› Importance of record-keeping

› Documenting conversations regarding intent, restrictions & conditions

› Guidelines for communications with donors

› Checklists for potential issues

› Consider print & online solicitations also

› Periodic review & revisit existing restrictions

› Internal tracking of spending/investments

Education/Training Issues

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Endowment Policy Considerations

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Endowment Fund Policy› Policy of the management of endowments

• Philosophy & attitude • Delegation of authority considerations• Fiduciary responsibilities – board, committees, reporting• Objectives related to growth, targets, goals & benchmarks • Allowable investments, asset allocation• Clarity of fund restrictions & interpretations• Periodic reviews & updates of the policy

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Fiduciary Responsibility & Delegation of Authority Policy Considerations› What documents govern activities?

• Charter • Bylaws • Laws • Trust documents

› What governing body is tasked with managing the endowment?• Board of separate 501(c)(3) • Finance & investment committee• Executive committee• Development & public relations committee

› Outsourced

Any person serving on the governing committee has a fiduciary responsibility under UPMIFA

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Gift Acceptance Policy› Mission requirement

› Types of gifts (liquid, real estate, land, partnerships, alternative investments)

› Restrictions to programs/campaigns

› Administration fees

› Credit risk of the donor

› Donor advised funds

› Delegation of Authority

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Gift Instruments – UPMIFA › Donor gift document in whatever form available› Expansive definition› Can include

• Electronic writing • Will, deed, grant or conveyance• Agreement or memorandum• Articles/Certificate or bylaws (where gift is made for general purposes)• Minutes of meetings• Canceled checks• Institutional solicitation (where gift is made in response)

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Investment Policies› Business plan of the ENTIRE investment portfolio › Reassures potential donors of investment stewardship› Required by UPMIFA› Sets the risk tolerance› Fiduciary responsibility of the board› Necessary for GAAP-required disclosures› Financial advisors/investment managers

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Spending Distribution Policies› Donor always rules!

› Parameters

› Mission

› Communicates the prudent distribution method

› Sets parameters for spending patterns & distribution uses

› Frequency, percentages & disbursements are made in accordance with the spending policy

› Prevents excessive distributions, promotes good stewardship

› Fiduciary liability required by UPMIFA

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UPMIFA – General Approach› UPMIFA takes a two-tier approach – its provisions apply to “Institutional

Funds” (the duties & factors related to management & investment) & a portion (the expenditure/appropriation/spending rules) only apply to “Endowment Funds”

› So, whether (& how) UPMIFA applies to you depends on whether you have an institutional fund or endowment fund

› UPMIFA potentially applies to all charitable entities regardless of form, e.g., nonprofit corporations, nonprofit associations, limited liability companies, trusts

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› Common misconception that this is a safe harbor, particularly because UMIFA gave us abright line rule

› Applies to expenditures from TUPMIFA endowment funds, but not to institutional funds› If spending from endowment fund exceeds thresholds

• Funds > $1MM – presumption at 7% FMV› University systems > $450MM – 9% FMV

• Funds < $1MM – presumption at 5% FMV› FMV determined quarterly & averaged over a 3-year period (or if in existence less than 3

years, for the period since inception)

› Presumption is rebuttable if facts & circumstances dictate that expenditure fromthe endowment fund was prudent (for example, a fund for a major constructionproject may have no expenditures for 3 years & then spend 20% in year 4)

UPMIFA Presumption of Imprudence

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› Delegation of Management & Investment Functions

› Duty of Loyalty

› Duty of Care

› Duty to Diversity

› Duty to Manage Costs & Verify Facts

UPMIFA Protections & Duties

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Modification & Release – UPMIFA › Permits release or modification of restrictions by donor, charity or court in specific

instances› Small/Old Funds – if restriction is unlawful, impracticable, impossible to achieve

or wasteful, an institution may release or modify a restriction without donor consent or court approval if all of these conditions are met

• Institutional fund < $25,000• Institutional fund is more than 20 years old• Will be used consistent with charitable purposes• Requires Attorney General notice

› Example – $15,000 fund set up in 1973 for the cure of polio – with AG notice, can release restriction & use for a purpose consistent with original purpose, i.e., cure of other children’s diseases

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Modification of Restrictions –Outside of UPMIFA› What if the UPMIFA modification provisions don’t apply?› Does the gift agreement address?› Can donor consent?› Court Action› Attorney General Approval

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NFP Reporting Standard Impact on Endowments & Investments

2/11/2019

Effective Date: ASU 2016-14, Not-for-Profit Entities (Topic 958) – Presentation of Financial Statements of NFP Entities› Effective for financial statements for fiscal years beginning after

December 15, 2017, & for interim periods within fiscal years beginning after December 15, 2018

› Consideration of single year financial statements

› Fee increases & expectations

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Investments

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ASU 2016-14: Investments› Report investment return net of external & direct internal investment expenses

& no longer require disclosure of those netted expenses.› Direct internal investment expenses involve the direct conduct or direct

supervision of the strategic & tactical activities involved in generating investment return. These include, but are not limited to, both of the following

• Salaries, benefits, travel & other costs associated with the officer & staff responsible for the development & execution of investment strategy.

• Allocable costs associated with internal investment management & supervising, selecting & monitoring of external investment management firms.

• Direct internal investment expenses do not include items that are not associated with generating investment return. For example, the costs associated with unitization & other such aspects of endowment management would not be allocated.

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Expenses Versus Losses

› Expenses are outflows of assets or incurrences of liabilities that result from an NFP's ongoing major or central operations & activities

› Losses are decreases in net assets from an NFP's peripheral or incidental transactions & other events & circumstances affecting the NFP other than those that result from expenses

› Gains & losses result from holding assets or liabilities while their values change

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Expenses Versus Losses

› No requirement to report losses by functional category› Examples of losses

• Bad debt – can be either expense or loss• Impairment of long-lived assets • Change in market value of investments • Foreign exchange rates• Natural catastrophes• Sell of building & equipment• Winning/losing a lawsuit

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UPMIFA Factors to Consider for Investments› General economic condition› The possible effect of inflation or deflation› The expected tax consequences, if any, of investment decisions or strategies› The role that each investment or course of action plays within the overall investment

portfolio of the fund› The expected total return from income & the appreciation of investments› Other resources of the institution› The need of the institution & of the fund to make distributions & preserve capital› An asset’s special relationship or special value, if any, to the charitable purposes of the

institution

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Investment Policies Disclosures› Requirement

• A description of the NFP’s endowment investment policies, including all of the following

› Return objectives & risk parameters

› How return objectives relate to the NFP’s endowment spending policy (often included in the spending policy)

› The strategies employed for achieving return objectives

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Investment Policy Example

Return Objectives and Risk Parameters - The School has adopted investment and spending policies for endowment assets that attempt to provide a predictable stream of funding to programs supported by its endowments while seeking to maintain thepurchasing power of the endowment assets. Endowment assets include those assets of donor-restricted funds that the school must hold in perpetuity or for donor-specified periods as well as board-designated funds. Under this policy, as approved by the Board of Trustees, the endowment assets are invested in a manner that is intended to produce results so that the endowment investments are in the top quartile of any distribution of competitors’ performance over rolling five-year or ten-year periods. The School expects its endowment funds, over time, to increase faster than the rate of inflation. Actual returns in any given year may vary.

Strategies Employed for Achieving Objectives - To satisfy its long-term rate-of-return objectives, the School relies on a total return strategy in which investment returns are achieved through both capital appreciation, realized and unrealized, and currentyield, such as interest and dividends. The School targets a diversified asset allocation that has a long-term target of 60% equities, 20% inflation protection, and 20% fixed income to achieve its long-term return objectives within prudent risk constraints.

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Investment Policy ExampleReturn Objectives and Risk Parameters - The Foundation has adopted investment and spending policies for endowment assets that attempt to provide a predictable stream of funding to programs supported by its endowment while seeking to maintain the purchasing power of the endowment assets. Under this policy, as approved by the Foundation’s Board of Directors, the endowment assets are invested in a manner that is intended to achieve a cumulative real rate of return (nominal return less the Consumer Price Index) of between 1% and 2.5% compounded annually for a moving five-year period. Actual returns in any given year may vary from this amount.

Strategies Employed for Achieving Objectives - To satisfy its long-term rate-of-return objectives, the Foundation relies on a total return strategy in which investment returns are achieved through both capital appreciation, realized and unrealized, and current yield such as interest and dividends. The Foundation targets a diversified asset allocation that places a greater emphasis on equity-based investments to achieve its long-term return objectives within prudent risk constraints.

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Example Disclosure –Investment/Spending› Laws & regulations allow the governing board to appropriate so much of an

endowment fund as is prudent considering the following relevant factors: the duration & preservation of the endowment fund, the purposes of Not-for-Profit Entity A & the endowment fund, general economic conditions, the possible effect of inflation or deflation, the expected total return from income & the appreciation of investments, Not-for-Profit Entity A’s other resources & Not-for-Profit Entity A’s investment policy

› Under Not-for-Profit Entity A’s endowment spending policy, 5% of the average of the fair value at the end of the previous three years is appropriated, which was $7,500 for the year ended June 30, 20X1

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Spending Policy Examples

The School has a policy of appropriating for distribution each year four to five percent of its endowment assets’ average fair value over the prior 12 quarters through the fiscal year-end preceding the fiscal year in which the distribution is planned. This is consistent with the School's objective to maintain the purchasing power of the endowment assets held in perpetuity or for a specified term as well as to provide additional real growth through new gifts and investment return.

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Spending Policy Examples

The Alliance has a policy of appropriating for distribution each year an amount appropriate to the various endowments. The distribution rate, expressed as a percentage of market value of the endowment investments, is determined on a year-to-year basis by the Executive Committee upon recommendation of the Finance and Audit Committee of the Board. In light of current market conditions, the Alliance does not expect to make distributions from the earnings of permanently restricted endowment funds in the next fiscal year.

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Spending Policy Examples

The XXX has a spending policy to distribute from the Endowment Fund annually no more than four percent (4%) of the average of the fair market value of the Endowment Fund on June 30 of the current year and the immediate two prior years. In the event of exceptional growth in the Endowment Fund, the Finance Committee and Endowment Committee may consider additional distributions, subject to approval of the Board of Trustees.

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Spending Policy Examples

The XXX Garden Endowment is a permanently restricted endowment fund with a donor-imposed spending policy that overrides the general spending policy of the Foundation. The donor has specified an annual spending rate of 4% which is to be followed even if it should result in some use of principal.

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Financial Statements from ASU 2016-14: Statement of Financial Position

NFP – Statement of Financial Position Previous Presentation: Net AssetsNET ASSETS

Unrestricted

Board-designated operating reserve 3,158,984

Board-designated strategic growth reserve 11,400,000

Property & equipment 9,286,537

Other 8,293,744

Total unrestricted 32,139,265

Temporarily restricted 2,926,049

Permanently restricted 1,409,634

Total net assets 36,474,948

Total liabilities & net assets$

36,636,280

Previous classifications

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NFP – Statement of Financial Position ASU 2016-14 Presentation: Net Assets

Classification in ASU 2016-14

NET ASSETS

Without donor restrictions

Board-designated operating reserve 3,158,984

Board-designated strategic growth reserve 11,400,000

Undesignated 17,580,281

Total without donor restrictions 32,139,265

With donor restrictions 4,335,683

Total net assets 36,474,948

Total liabilities & net assets $ 36,636,280

Note: NFP does not have any quasi-endowments

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Financial Statements from ASU 2016-14: Statement of Activities & Changes in Net Assets

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NFP – Statement of Activities ASU 2016-14 Presentation: Revenues

Without Donor With DonorRestrictions Restrictions Total

REVENUES, GAINS & OTHER SUPPORT

Contributions $ 4,235,098 $

15,000 $

4,250,098

In-kind contributions 74,837 - 74,837

Government grants 2,692,546 - 2,692,546 Special events, net of cost of direct benefit to

donors of $608,853 2,106,429 - 2,106,429 Investment return, net 292,667 167,426 460,093

Miscellaneous income 11,731 - 11,731

Net assets released from restriction 1,215,402 (1,215,402) -

Total revenues, gains & other support 10,629,610 (1,032,976) 9,596,634

Two classifications

Determination of without donor restrictions remains unchanged from previous “unrestricted” classification

Determined by adding previously classified temporarily restricted & permanently restricted together

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NFP – Statement of Activities ASU 2016-14 Presentation: Expenses & Changes in Net Assets –Revised from Allocations

Identification of major programs on the face of the statement of activities

Remains unchanged

Without Donor With DonorRestrictions Restrictions Total

EXPENSESProgram A 4,984,948 - 4,984,948 Program B - - -Program C - - -General & administrative 484,519 - 484,519 Fundraising 527,367 - 527,367

Total expenses 5,996,834 - 5,996,834

CHANGES IN NET ASSETS 4,632,776 (1,032,976) 3,599,800

NET ASSETS AT BEGINNING OF YEAR 27,506,489 5,368,659 32,875,148

NET ASSETS AT END OF YEAR $ 32,139,265 $ 4,335,683 $ 36,474,948

Assumes that the entity has no losses

Expense totals change to reflect presentation of investment return, net & change based on functional analysis

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Endowment Disclosure Requirements

Disclosure Requirements› An NFP shall disclose information to enable users of financial

statements to understand all of the following about its endowment funds (both donor-restricted & board-designated)

• A description of the governing board’s interpretation of the law or laws that underlie the NFP’s net asset classification of donor-restricted endowment funds

• Net asset classification

• Net asset composition

• Changes in net asset composition

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Disclosure Requirements› An NFP shall disclose information to enable users of financial

statements to understand all of the following about its endowment funds (both donor-restricted & board-designated)

• A description of the NFP’s policy or policies for the appropriation of endowment assets for expenditure (its endowment spending policy or policies)

• Related investment policies• Disclosure of aggregate deficiencies of all donor-restricted endowment funds.

Therefore, if one endowment has unrealized gains while another has unrealized losses, the not-for-profit organization should account for each donor-restricted endowment fund individually rather than netting the gains of one endowment fund with the losses of another endowment

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Endowments DisclosureNew disclosure format

Changes in endowment net assets are as followsWithout Donor

RestrictionsWith Donor Restrictions Total

Endowment net assets at beginning of year $ - $ 2,021,145 $ 2,021,145

Investment return, net - 9,550 9,550

Contributions - 125,000 125,000

Annual adjustment to corpus for inflation - - -Appropriation of endowment assets for expenditure - (91,115) (91,115)

Endowment net assets at end of year $ - $ 2,064,580 $ 2,064,580

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Example Disclosure – Endowment Funds

Endowment net assets composition by type of fund as of June 30, 20XX

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Example Disclosure – Endowment Funds

Changes in endowment net assets for the fiscal year ended June 30, 20XX

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Introduction to the NoteExample:

The School’s endowments consist of approximately 155 funds established for a variety of purposes. Itsendowments include both donor-restricted endowment funds and funds designated by the Board of Trustees tofunction as endowments (quasi-endowments). As required by GAAP, net assets associated with endowmentfunds, including quasi-endowments, are classified and reported based on the existence or absence of donor-imposed restrictions. The School manages its endowments on a pooled basis, under the direction of the AssetsManagement Committee, and earnings on the pooled investments are allocated on a pro rata basis to each of thefunds.

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Description of LawExample:

Interpretation of Relevant Law - The Board of Trustees of the School has interpreted the Uniform Prudent Management of Institutional Funds Act (UPMIFA)as requiring the preservation of the fair value of the original gift as of the gift date of the donor-restricted endowment funds absent explicit donor stipulations tothe contrary. As a result of this interpretation, the School classifies as permanently restricted net assets (a) the original value of gifts donated to the permanentendowment, and (b) the original value of subsequent gifts to the permanent endowment.

The remaining portion of the donor-restricted endowment fund that is not classified in permanently restricted net assets is classified as temporarily restricted netassets until those amounts are appropriated for expenditure by the School in a manner consistent with the standard of prudence prescribed by UPMIFA.

In accordance with UPMIFA, the School considers the following factors in making a determination to appropriate or accumulate donor-restricted endowmentfunds:

› The duration and preservation of the fund;› The purposes of the School and the donor-restricted endowment fund;› General economic conditions;› The possible effect of inflation and deflation;› The expected total return from income and the appreciation of investments;› Other resources of the School; and› The investment policies of the School.

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Other Disclosure Issues

› What about the organization that has a Community Foundation hold its endowment?

Beneficial Interest Note: In November 2007, the Organization established a designated endowment fund at the ABC Foundation. The assets of the Funds are held and owned by the Foundation in its corporate capacity and are not deemed held by the Foundation as trustee of a separate trust for the Organization. Donors granted no variance power to the Foundation. The Foundation must distribute not less often than annually, unless otherwise requested by the Organization, approximately 5% (determined by the Board of Trustees of the Foundation) of the fair market value of the Funds, with the excess earnings, if any, being added to principal. The principal of the endowment must be retained, administered, and managed by the Foundation for the benefit of the Organization. The Organization requested that no funds be distributed for either year ended June 30, 20XX or 20XX.

Endowment Note: Endowment Policies and Strategies - The Organization’s endowment is invested at the ABC Foundation and subject to its investment policies. As noted in Note 5, the Foundation must distribute not less often than annually, unless otherwise requested by the Organization, approximately 5.25% (determined by the Board of Trustees of the Foundation) of the fair market value of the Funds, with the excess earnings, if any, being added to principal. The principal of the endowment must be retained, administered, and managed by the Foundation for the benefit of the Organization. The Organization requested that no funds be distributed for either year ended June 30, 20XX or 20XX.

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Underwater Endowment Fund Changes

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ASU 2016-14: Underwater Endowment Fund› What is an underwater endowment fund?› Accounting change of underwater endowment funds & classifications› Provide the following enhanced disclosures about

• Underwater endowment funds, which include required disclosures of› An NFP’s policy & any actions taken during the period, concerning appropriation from

underwater endowment funds › Aggregate fair value of such funds › Aggregate of the original gift amounts (or level required by donor or law) to be maintained› Aggregate amount by which funds are underwater (deficiencies), which are to be classified as

part of net assets with donor restrictions

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Deficiencies

Requirement

For each period for which a statement of financial position is presented, an NFP shall disclose the aggregate amount of the deficiencies for all donor-restricted endowment funds for which the fair value of the assets at the reporting date is less than the level required by donor stipulations or law.

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Deficiencies Example

Funds with Deficiencies - From time to time, the fair value of assets associated with individual donor restricted endowment funds may fall below the level that the donor or UPMIFA requires the School to retain as a fund of perpetual duration. In accordance with GAAP, deficiencies of this nature that are reported in unrestricted net assets were $3,199,944 as of June 30, 20XX. These deficiencies resulted from unfavorable market fluctuations that occurred during the year.

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Deficiencies ExamplesFunds with Deficiencies - From time to time, the fair value of assets associated with individual donor restricted endowment funds may fall below the total amount of the gifts made to the endowment by the donor. Deficiencies of this nature that are reported with donor restrictions were $858,399 and $2,599,771 as of December 31, 20XX and 20XX, respectively. These deficiencies resulted from unfavorable market fluctuations.

Funds with Deficiencies - From time to time, the fair value of assets associated with individual donor restricted endowment funds may fall below the level that the donor contributed. There were no deficiencies at December 31, 20XX or 20XX.

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Board & Management Designations/Appropriations & Enhanced Disclosure Requirements

ASU 2016-14: Board & Management Designations› Provide the following enhanced disclosures about

• Amounts & purposes of governing board designations that result in self-imposed limits on the use of resources

› Examples• Earmarked for future programs• Investment• Contingencies• Purchase or construction of fixed assets• Other uses• Some governing boards delegate the designation to internal management, which are

required to be considered & included in board-designated net assets

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Provide Enhanced Disclosures –Board Designations/Appropriations› Governing board designations, appropriations & similar transfers that

result in the addition or removal of self-imposed limits on the use of resources without donor-imposed restrictions

› Those disclosures would include• A description of the purpose, if not clear on the statement of financial position• Amounts• Types of transfers, e.g., those done because of standing board policies, as one-

time decisions, or for other reasons• Qualitative &• Quantitative information about any period-end balances of board designations

of net assets without donor restrictions

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Net Asset Requirements for Presentation & Enhanced Disclosure Requirements

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Classification of Net Assets› Example net assets classification (think of these as the new buckets

required)• Assets, such as land or works of art, donated with stipulations that they be used

for a specified purpose, be preserved & not be sold

• Assets donated with stipulations that they be invested to provide a permanent source of income. These result from gifts & bequests that create a donor-restricted endowment that is perpetual in nature

• Support of particular operating activities — should use the top three programs• Investment for a specified term• Use in a specified future period • Acquisition of long-lived assets

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Donor-Designated Restriction Disclosure

2016With donor restrictions:

Specific future periodsUnconditional Promises to Give – Not received $ 80,000 Unconditional Promises to Give – Program A 2,138,114 Allowance for Uncollected Promises (42,000)

Specific program and support activities – EndowmentEndowment A 147,350 Endowment B 422,467 Endowment C 32,213 Other 147,905

Endowment – PerpetualEndowment A 534,122

Endowment B 875,512

Total net assets with donor restrictions $ 4,335,683

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ASU 2016-14 Format A Net Assets Released from Restrictions › FY 2016

• One line on the face of the SOA for “Net Assets” released from restrictions

› ASU 2016-14 Format A provides the following additional disclosure on the face of the SOA related to Net Assets released from restrictions

• Satisfaction of program restrictions• Satisfaction of equipment acquisition restrictions• Expiration of time restrictions• Changes in unconditional promises to give• Appropriation from donor endowment & subsequent satisfaction of any related

donor restrictions

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Release of Restrictions Footnote Example

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Liquidity Disclosure Requirements

ASU 2016-14: Liquidity Disclosures/PresentationProvide the following enhanced disclosures about

› Quantitative information 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 1) its nature,

2) external limits imposed by donors, grantors, laws & contracts with others, &

3) internal limits imposed by governing board decisions

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ASU 2016-14: Liquidity Disclosures/Presentation› Relevant information about the nature & amount of limitations on the use of cash & cash

equivalents (such as cash held on deposit as a compensating balance)

› Contractual limitations on the use of particular assets • These include, for example,

› restricted cash or other assets set aside under debt agreements,

› assets set aside under self-insurance funding arrangements,

› assets set aside under collateral arrangements, or

› assets set aside to satisfy reserve requirements that states may impose under charitable gift annuity agreements

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The NFP – Financial Assets, at Year End

2016

FINANCIAL ASSETS, AT YEAR END

Cash and cash equivalents $ 4,664,717

Investments 17,588,836

Investments – endowments with donor restrictions 2,011,664

Grants receivable 463,921

Pledges receivable, net 2,176,114

Other receivables 168,599

Beneficial interest in agency endowment 147,905

Total assets $ 27,221,756

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The NFP: Liquidity ExampleFinancial assets available at year end $ 27,221,756

Less those unavailable for general expenditures within one year, due to:

Undesignated bonds that mature in a period of time greater than one year (3,029,852)

Contractual or donor-imposed restrictions:

Restricted by donor for perpetual purpose (1,409,634)

Restricted by donor for time restriction beyond one year (1,135,119)

Subject to appropriation and satisfaction of donor restrictions (749,935)

Board designations:

Amounts set aside for long-term investing (11,400,000)

Amounts set aside for liquidity reserve (3,158,984)

Financial assets available to meet cash needs for general expenditures within one year $ 6,338,232

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Liquidity DisclosureNew standard

The NFP's financial assets available within one year of the balance sheet date for general expenditure are as follows

Cash and cash equivalents $ 4,664,717

Grants receivable 463,921

Pledges receivable expected to be collected in less than one year 1,040,995

Other receivables 168,599

$6,338,232

As part of The NFP's liquidity management, it has a policy to structure its financial assets to be available as its general expenditures, liabilities and other obligations come due. In addition, The NFP invests cash in excess daily requirements in short-term investments.

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ASU 2016-14: Liquidity Example Note › Not-for-Profit Entity A is substantially supported by restricted contributions.

Because a donor’s restriction requires resources to be used in a particular manner or in a future period, Not-for-Profit Entity A must maintain sufficient resources to meet those responsibilities to its donors. Thus, financial assets may not be available for general expenditure within one year.

› As part of Not-for-Profit Entity A’s liquidity management, it has a policy to structure its financial assets to be available as its general expenditures, liabilities & other obligations come due.

› In addition, Not-for-Profit Entity A invests cash in excess of daily requirements in short-term investments. Occasionally, the board designates a portion of any operating surplus to its liquidity reserve, which was $1,300 as of June 30, 20X1.

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ASU 2016-14: Liquidity Example Note› There is a fund established by the governing board that may

be drawn upon in the event of financial distress or an immediate liquidity need resulting from events outside the typical life cycle of converting financial assets to cash or settling financial liabilities

› In the event of an unanticipated liquidity need, Not-for-Profit Entity A also could draw upon $10,000 of available lines of credit (as further discussed in Note XX) or its quasi-endowment fund

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ASU 2016-14: Liquidity Example Note

› The following slide reflects Not-for-Profit Entity A’s financial assets as of the balance sheet date reduced by amounts not available for general use because of contractual or donor-imposed restrictions within one year of the balance sheet date

› Amounts not available include amounts set aside for long-term investing in the quasi-endowment that could be drawn upon if the governing board approves that action

› Amounts already appropriated from either the donor-restricted endowment or quasi-endowment for general expenditure within one year of the balance sheet date are not subtracted as unavailable

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ASU 2016-14: Liquidity Example Note› Not-for-Profit Entity A is substantially supported by restricted

contributions. Because a donor’s restriction requires resources to be used in a particular manner or in a future period, Not-for-Profit Entity A must maintain sufficient resources to meet those responsibilities to its donors.

› Thus, financial assets may not be available for general expenditure within one year. As part of Not-for-Profit Entity A’s liquidity management, it has a policy to structure its financial assets to be available as its general expenditures, liabilities, and other obligations come due.

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ASU 2016-14: Liquidity Example Note› In addition, Not-for-Profit Entity A invests cash in excess of daily requirements in short-

term investments. Occasionally, the board designates a portion of any operating surplus to its liquidity reserve, which was $1,300 as of June 30, 20X1.

› There is a fund established by the governing board that may be drawn upon in the event of financial distress or an immediate liquidity need resulting from events outside the typical life cycle of converting financial assets to cash or settling financial liabilities.

› In the event of an unanticipated liquidity need, Not-for-Profit Entity A also could draw upon $10,000 of available lines of credit (as further discussed in Note XX) or its quasi-endowment fund.

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BKD, LLP is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: www.nasbaregistry.org.

Continuing Professional Education (CPE) Credit

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CPE Credit

› CPE credit may be awarded upon verification of participant attendance

› For questions, concerns or comments regarding CPE credit, please email the BKD Learning & Development Department at training@bkd.com

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BKD Thoughtware®

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The information contained in these slides is presented by professionals for your information only & is not to be considered as legal advice. Applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor or legal counsel before acting on any matters covered.

2/11/2019

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