A New Look for Nonprofits

Eric Glantz and Caroline Judy December 14, 2016

Raffa Learning Community

Thrive. Grow. Achieve.

LEARNING OBJECTIVE

Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of

Financial Statements of Not-for-Profit Entities. • It has been more than two decades since the FASB

has significantly overhauled the financial statement presentation of non profit organizations.

• Most of the changes do not significantly impact the fundamental accounting utilized by nonprofits; rather most changes impact how nonprofit financial statements are being presented to the financial statement user

• Course will discuss the timeline and significant changes necessary for compliance (by financial statement component)

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TOPIC OVERVIEW

• Effective Date

• Net Asset Classes

• Investment Return

• Classification of Expenses

• Statement of Cash Flows

• Liquidity Disclosures

• Operating Measure Disclosures

• Transition Guidance

• Q&A

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ASU 2016-14 NFP ENTITIES (TOPIC958): PRESENTATION OF FINANCIAL

STATEMENTS OF NFP’S

• Applies to NFPs including nongovernmental entities such as charities, foundations, college and universities, health chare providers, cultural institutions, religious organizations, trade associations and other NFPs

• FISCAL YEARS BEGINNING AFTER DECEMBER 15, 2017 • For most NFPs the new guidance will be effective for

FS’s with fiscal years ending December 31, 2018

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NET ASSET CLASSES

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NET ASSET CLASSES

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Currently Net Assets are required to be categorized into three classes:

• Available for current operations • Board-designated

Unrestricted Net Assets

• With donor restrictions that expire once a purpose is accomplished or with the passage of time

Temporarily Restricted

• Donor restrictions that do not expire

• Funds to be held in perpetuity, i.e. an endowment fund

Permanently Restricted

NET ASSET CLASSES

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New Guidance re-titles and collapses Net Asset classes as follows:

• Unrestricted Net

Assets Without Donor

Restriction

• Temporarily Restricted Net Assets

• Permanently Restricted Net Assets

With Donor Restriction

NET ASSET CLASSES

• Without Donor Restrictions – Undesignated – Board-designated

• Must disclose amount, purpose and type of board designation

• With Donor Restrictions – Disclose nature, amount and timing of restrictions at

the end of the period and how the restrictions affect the use of resources • Endowment footnote disclosures remain with the

underwater portion of endowment funds that are currently classified as unrestricted now being classified as with donor restrictions

• Donor restrictions on donated long-lived assets will now be required to be released when the asset is placed in service

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NET ASSET CLASSES

Net Asset footnote disclosures are being enhanced to include additional information:

– 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

– Composition of net assets with donor restrictions at the end of the period and how the restrictions affect the use of resources

– Underwater net assets: • Nonprofits policy, and any actions taken during the period,

concerning appropriations from underwater endowment funds • The aggregate fair value of such funds • The aggregate of the original gift amount (or level required) to be

maintained • The aggregate amount by which funds are underwater, which are

to be classified as part of the net assets with donor restrictions

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NET ASSET CLASSES

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NET ASSET CLASSES

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INVESTMENT RETURN

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INVESTMENT RETURN

• Currently investment income and expenses are either reported separately or net of one another in the financial statements

• New Guidance: – A net presentation of investment expenses against

investment return is required on the face of the statement of activities

– External and direct internal investment expense will be netted against the investment return

– Disclosure of netted investment expenses is no longer required in the financial statement notes

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INVESTMENT RETURN

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CLASSIFICATION OF EXPENSES

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CLASSIFICATION OF EXPENSES

• All nonprofits will now be required to present an analysis of expenses by both nature and function in one location in the financial statements, either as: – A separate statement

• Already required for health and welfare organizations • Used as a supplemental schedule by many nonprofits • May be the most effective presentation option for nonprofits with

more than one program – On the face of the statement of activities – Disclosure in the notes to the financial statements

• Enhanced disclosures for cost allocation methods and guidance on management and general activities – Additional disclosure regarding specific methodologies used to

allocate costs among program and supporting functions. – Investment expenses that have been netted against investment

return are not permitted to be included

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CLASSIFICATION OF EXPENSES

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STATEMENT OF CASH FLOWS

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STATEMENT OF CASH FLOWS

• Preliminary deliberations by the FASB nonprofit task force resulted in permitting both the direct and indirect methods to be presented – The intent is to allow nonprofits to select the

presentation method that best serves their needs by providing greater flexibility in financial reporting

• Eliminates the indirect reconciliation requirement if the direct method is elected

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STATEMENT OF CASH FLOWS

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STATEMENT OF CASH FLOWS

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LIQUIDITY DISCLOSURES

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LIQUIDITY DISCLOSURES

• Requires nonprofits to disclose their policy for managing liquid financial assets to satisfy short term cash requirements.

• Quantitative information that communicates how the nonprofit manages its liquid resources available to meet cash needs for general expenditure within one year. – Availability could be affected by:

• The asset's nature • External limits imposed by donors or others • Internal actions of the governing board

• Qualitative information about how the entity manages its liquidity, financial flexibility, and allocation of resources. – The types of resources used and how they are

allocated in carrying out the nonprofits activities

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LIQUIDITY DISCLOSURES

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LIQUIDITY DISCLOSURES

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OPERATING MEASURE DISCLOSURE

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OPERATING MEASURE DISCLOSURE

• Many nonprofits chose to make a distinction between operating and non-operating activities on the statement of activities resulting in inconsistencies in how nonprofits define a measure of operations

• Presenting an intermediate measure of operations is still allowable although disclosures will be enhanced to provide additional information about the items included or excluded from the operating measure

• Phase 2 of the FASB’s project is scheduled to address the following additional issues: – Whether to require intermediate measure(s) – Whether and how to define such measure(s) and what items

should be included – Alignment of measures of operations in the statement of

activities with measures of operations in the statement of cash flows

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OPERATING MEASURE DISCLOSURE

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OPERATING MEASURE DISCLOSURE

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OPERATING MEASURE DISCLOSURE

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TRANSITION GUIDANCE

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TRANSITION GUIDANCE

• ASU 2016-14 NFP entities (topic958): Applies to NFPs including nongovernmental entities such as charities, foundations, college and universities, health chare providers, cultural institutions, religious organizations, trade associations and other NFPs – Should be applied on a retrospective basis:

• Apply ALL provisions in year of adoption • Comparative years – Apply all provisions but may elect

not to include: – Disclosures regarding liquidity – Expenses by nature and function

• Disclose the nature of any reclassifications or restatements and their effects, if any, on changes in net assets for each period presented

• Early adoption is permitted but must apply regular transition provisions

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QUESTIONS & ANSWERS

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This information may not be reproduced without written permission from Raffa, P.C., 1899 L Street, NW, Suite 850, Washington, DC 20036 (202) 822-5000

For information for and about nonprofits visit

www.iknow.org

To become or find a nonprofit board member visit

www.boardnetusa.org

CONTACT INFORMATION

Visit our Web Site at www.raffa.com Eric Glantz, Partner Caroline Judy, Audit Manager Direct: 202-955-5412 Direct: 202-955-6717 e-mail: EGlantz@raffa.com e-mail: CJudy@raffa.com

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THANK YOU!

20XXASSETS

Cash and cash equivalents 337,000$ Pledges receivable, net 995,000 Accounts receivable 22,000 Inventory 198,000 Prepaid expenses and other assets 2,000 Investments 7,075,000 Fixed assets, net 4,434,000

TOTAL ASSETS 13,063,000$

LIABILITIES AND NET ASSETSLiabilities

Accounts payable and accrued expenses 105,000$ Line of credit 150,000 Deferred revenue 62,000

TOTAL LIABILITIES 317,000

Net Assets Without donor restriction

Undesignated 4,612,000 Board designated 782,000

Total without donor restriction 5,394,000

With donor restriction 7,352,000

TOTAL NET ASSETS 12,746,000

TOTAL LIABILITIES AND NET ASSETS 13,063,000$

STATEMENT OF FINANCIAL POSITION12/31/20XX

_______________

1. Pledges Receivable

For the year ended December 31, 20XX, pledges receivable include unconditional promises to give from foundations and individuals. All amounts are deemed fully collectible and are expected to be due as follows:

498,000$

518,000

20,000

1,036,000

(41,000)

995,000$

Of the amounts due in less than one year, $120,000 is donor restricted for programmatic purposes and $147,000 is restricted for the endowment fund.

2. Accounts Receivable

All amounts are deemed fully collectible and are due within one year.

3. Endowment Funds

Endowment Fund Corpus 7,042,000$ Cumulative Unspent Endowment Investment Earnings 33,000 Underwater Endowment Funds, net (395,000) Endowment funds held in cash and cash equivalents (49,000) Endowment funds - Accounts (interest) receivable (8,000) Endowment funds in pledges receivable (590,000)

Endowment Fund Investments 6,033,000$

4. Board Designated Net Assets

5. Donor Restricted Net Assets

Investments - Donor designated 260,000$ Accounts (Interest) Receivable - Donor designated 1,000 Pledges receivable - Donor designated 412,000

Donor Restricted Net Assets (excluding endowment) 672,000$

Restricted by the donor for a specific programmatic purpose. It is the NPO's strategy to invest these funds in liquid, interest bearing investments until spent on the donor purpose.

Less: Discount to Present Value

NPO’s endowment is composed of donor-restricted endowment funds. As required by GAAP, net assets associated with endowment funds are classified and reported based on the existence or absence of donor-imposed restrictions.

Income from the endowment fund is distributed based on a spending rate up to 5% of the beginning of the year balance of the endowment-invested funds for the previous year (drawn on an annual basis), as established by the NPO’s Board of Trustees. During the year ended December 31, 20XX, the NPO’s Board of Trustees appropriated $251,000 for operations.

Unrestricted net assets also include generous donor contributions that have not been restricted by the donor, but have been placed into a reserve fund to be prudently expended at the designation of the Board of Trustees. Boarddesignated net assets are invested and subject to the same spending policy as the NPO's endowment fund.

Due in less than one year

Due in one to five years

Due after five years

Total Pledges Receivable

Pledges Receivable, Net

Portion of the endowment fund investments that lacks a donor purpose restriction is $1,275,000 as of December 31, 20XX.

Available Financial Assets of NPO AvailableFinanical Assets

Cash and Cash Equivalents:Cash and cash equivalents 337,000$ Less: Cash held for endowment fund (49,000)

288,000$

Accounts ReceivableAccounts receivable 22,000 Less: Interest receviable associated with donor restricted funds (9,000)

13,000

Pledges ReceivablePledges receivable, net 995,000 Less: Amounts Due in More than One Year (497,000) Less: Donor restricted pledge receivables (267,000)

231,000

InvestmentsInvestments 7,075,000 Less: Endowment Fund Investments (6,033,000) Less: Board Designated Net Asset Investments (782,000) Less: Donor restircted net asset investments (260,000) Plus: Endowment and Board-Designated 5% Spend Endowment Fund 1,275,000$ 5% 64,000 Board Designated Fund 782,000$ 5% 39,000

103,000103,000

635,000$