New Nonprofit Financial Standards ASU 2016-14 · Net Asset Classification FASB Glossary definition Net assets without donor restrictions subject to self-imposed limits by action of

Presented by:

Janice Moen, CPA

New Nonprofit Financial

Standards

ASU 2016-14

Copyright Janice Moen * Unauthorized Copying Prohibited

Objectives

• Give a basic understanding of the changes in Nonprofit Financial Standards.

• Discuss changes in policies and collection of financial data that need to be made at the beginning of your 2018 calendar year or your 2018-2019 fiscal year.

Key Provisions of ASU 2016-14

Net Asset Classification

Liquidity & Availability

Expenses

Statement of Cash Flows

Investment Return

Why the Change?

To help better communicate the financial condition of a nonprofit organization by providing more useful information to donors, grantors, creditors, and other

users of the financial statements.

Effective Now!

For fiscal years beginning after 12/15/2017

Calendar year 2018

Fiscal year July 1, 2018 – June 30, 2019

Fiscal year October 1, 2018 – Sept. 30, 2019




Expenses


Investment Return


The old Net Asset classifications were

confusing. They existed of three categories:

Unrestricted

Net Assets

Temp Restricted

Net AssetsPerm Restricted

Net Assets

The new Net Asset classifications clearly indicates

if there is an outside restriction on the assets:

Without Donor

Restrictions

With Donor

Restriction


Unrestricted Net Assets gave

the impression that there were

no restrictions on that amount of

assets and all could be spent for

operations.

Unrestricted

Net Assets

Since there can still be internal

restrictions, for example

board, legal or contractual

restrictions renaming this Net

Asset category was very

important to external users of

the financials.

Without Donor

Restrictions


FASB Glossary definition

Net assets without donor restrictions subject to self-imposed

limits by action of the governing board. Board-designated net

assets may be earmarked for future programs, investment,

contingencies, purchase or construction of fixed assets, or

other uses. Some governing boards may delegate

designation decisions to internal management. Such

designations are considered to be included in board-

designated net assets.

Without Donor

Restrictions


Disclosure RequirementsAll nonprofit organizations are required to disclose

board designations on the use of resources.

Must disclose:

1.Purpose of designation

2.Amount of designation

3.Types of designation

Without Donor

Restrictions


Net Assets:

Without donor restrictions -

Undesignated $ 24,931

Operating reserve 25,000

Quasi endowment 10,000

Designated by the Board for capital projects 75,125

$135,056

Without Donor

Restrictions


There was a blurring of

lines between Temporarily

Restricted and Permanently

Restricted Net Assets.

Because UPMIFA allows

board spending policies on

endowment funds then it did

not make sense to have

something classified as

permanently restricted if the

organization could spend it.

With Donor Restrictions

Perm Restricted

Net Assets

Temp Restricted

Net Assets


Though the face of the financials is simplified, FASB

now requires more disclosure information on donor

restricted net assets, including:

1. The use of contributed assets.

2. The effects of the restriction imposed to the different

classes of assets and liabilities.

3. The composition of net assets with donor restrictions

and how the restrictions affect the use of resources.



Underwater Endowments

Previously only the original amount of the endowment

was shown as restricted under the Permanently

Restricted category. Sometimes an endowment had

unrealized losses which had the effect of the

endowment fund being less than the original amount of

the permanently restricted donation. If that occurred,

you were to record this difference as unrestricted.



Underwater Endowments - PreviouslyOther assets:

Endowment Fund with Community Foundation $ 83,000

Net assets:

Unrestricted net assets: $ (20,000)

Temporarily net assets: 3,000

Permanently restricted net assets: 100,000



Underwater Endowments - NowOther assets:

Endowment Fund with Community Foundation $ 83,000

Net assets:

Without donor restriction: no effect

With donor restriction:

Endowment Fund $ 83,000



Endowments – Disclosures

In addition to aggregate amounts by which funds are

underwater you must also disclose the aggregate of

original gift amounts (or level required by donor or law)

for such funds, fair value, and any governing board

policy, or actions taken, concerning appropriation from

such funds.




Net Assets:

With donor restrictions -

Time restricted for future purposes $ 3,000

Purpose restricted 20,000

Endowment fund 50,420

$ 73,420



Gifts of Long-Term Assets

Previously a nonprofit organization could choose

between recognizing 100% of the value of the donated

long-term asset as an unrestricted contribution or

recognize the gift using the time-restriction approach.

The time-restricted approach the nonprofit would record

100% of the gift as temporarily restricted and then

move only a portion of the gift to unrestricted, thus

“matching” the depreciation expense.



Gifts of Long-Term Assets

Now, the time-restriction approach is no longer

allowed. A nonprofit organization must record

the value of any gift of a long-term asset as

unrestricted contribution in the year the gift was

given, unless there is a specific donor

restriction on that asset.



Beginning of Year Reclassification from:

Unrestricted

Net Assets

Temp Restricted

Net AssetsPerm Restricted

Net Assets

to:

Without Donor

Restrictions

With Donor

Restriction






Expenses


Investment Return


Many nonprofit organizations were impacted greatly from

the 2000 recession. Due to this, the new standard

requires:

1. Qualitative information communicating how an

nonprofit organization manages its liquid available

resources and its liquidity risk (in the notes to the

financials)

2. Quantitative information communicating the availability

of an nonprofit organization’s financial assets at the

balance sheet date to meet cash needs for general

expenditures in the next 12 months. This information

can be shown on the face of the financial statements or

in the notes to the financials.



Nonprofit organization that does not have enough liquid

assets to comply with donor restrictions disclosure.

Cash $ 9,210

Investments 185,100

Receivables 4,100

Total financial assets 198,410

Endowment fund (180,600)

Other donor restrictions (23,400)

Board Designation – operating reserve (10,000)

Financial assets available to meet cash $ (15,590)

needs for general expenditures in the next year




Expenses


Investment Return

Expenses

Natural

CategoriesFunction

Salaries

Rent

Utilities

Supplies

Etc.

Program A

Program B

Management &

General

Fundraising

Expenses

ASU 2016-14 requires all nonprofit

organizations to disclose all expenses

by nature and function within the

financial statements, either on the face

of the statements or in the notes.

Natural

CategoriesFunction

Expenses

Natural

CategoriesFunction

Expenses

Natural

CategoriesFunction

Nonprofits are required to provide

disclosures about the methods used

to allocate costs among program

and support functions.

Expenses

Natural

CategoriesFunction

ASU provides enhanced guidance on

allocations from M&G expense. Only

costs related to “Direct Conduct” or

“Direct Supervision” of an activity can be

allocated out of M&G.

(manage, control, steer, supervise)




Expenses


Investment Return


AUS 2016-14 continues to allow a choice

between the Direct Method and the Indirect

Method in presenting operating cash flows.

Previously if the Direct Method was used, a

reconciliation similar to the Indirect Cash Flow

Method was required. This reconciliation is no

longer required.

Direct MethodIndirect

Method


Direct Method


Indirect

Method


Entities that follow Governmental

Accounting Standards Board

standards are required to use the

Direct Method.

Direct MethodIndirect

Method




Expenses


Investment Return

Investment Return

Investment

Income

Net of:

Direct Internal

investment

expenses

Net of

External

investment

expenses

Salaries

Benefits

Travel

etc.

of individuals

hired by the

organization to

manage the

investments

Fees charged by

investment

advisors to

manage

investments.

Investment Return

Direct internal investment expenses involve the direct

conduct or direct supervision of the strategic and

tactical activities involved in generating investment

return. The following are some examples:

-Investment Mgr’s Compensation: Potentially all of

expense

-CFO’s Compensation: Potentially a partial allocation

of expense

-Investment Accountant’s Compensation:

Potentially a partial allocation of expense

-Investment Mgr’s Travel Expenses to Visit Fund

Managers: Potentially all of expense

-Accountant Performing Endowment Allocations:

None

Investment Return

Investment

Income

Net of:

Direct Internal

investment

expenses

Net of

External

investment

expenses

Shown on one line on Statement of Activities in the

Revenue section:

Revenues:

Investment Income $4,897

Resources

• FASB Accounting Standards Update No. 2016-14.

• AICPA “Not-for-Profit Accounting and Auditing Update”, Melisa F. Galasso, CPA; Course Code: 746133, Revised May 2017.

• FASB “In Focus: The New Not-For- Profit Financial

Reporting Standard: Get Ready For It!”, December

19, 2017.

Thank you!Janice Moen

Website: Janicemoencpa.com

Email: [email protected]

Phone: 505-250-2231

Documents

New Nonprofit Financial Standards ASU 2016-14 · Net Asset Classification FASB Glossary definition Net assets without donor restrictions subject to self-imposed limits by action of