What You Can Do Now for the New FASB Nonprofit Standard

Posted on Wednesday, November 29, 2017

The new FASB ASU 2016-14, Presentation of Financial Statements of Not-for-Profit Entities will be required for the year ending December 31, 2018 for calendar year organizations and for fiscal years ending in 2019.  There are significant changes that will occur with the implementation of the new standard for nonprofit organizations. 

To make sure your organization will be in compliance with the new requirements, here are some recommendations of what you can do now to prepare for implementation.

Net asset classifications.  The three existing classes of net assets (unrestricted, temporarily restricted and permanently restricted) will become two classes (net assets without donor restrictions and net assets with donor restrictions).  As a result, the statement of financial position and statement of activities will reflect the two new classes; however, the temporarily and permanently restricted disclosures by time, purpose and endowment currently required will still be required to be disclosed in the footnotes.

• What can you do?  Make sure donor restrictions are properly tracked. 

Underwater endowments.  Currently endowments that have a fair value that is less than the original gift are classified as unrestricted net assets.  The new ASU requires these underwater endowments to be shown as net assets with donor restrictions (formerly temporarily restricted and permanently restricted).  Additional disclosures will also be required including (1) the original amount of the endowment, (2) the organization’s policy for spending from these funds, and (3) whether the policy was followed.

• What can you do?  Make sure the organization has documentation for all endowments that include the dollar  amount of the original gift.  Review the organization’s endowment spending policy or implement a written spending policy if you don’t have one.  The spending policy includes a documented approach to how your endowment funds are to be disbursed and the organization’s policy for spending from underwater endowments.  Make sure the spending policy is followed.

Board designated net assets.  Additional disclosures will be required for funds designated by the board for specific purposes. 

• What can you do?  Any funds designated by the board of directors for a specific purpose should be approved by the board and noted as such in the board meeting minutes.  The purpose and dollar amount of each designation should be tracked by the organization. 

Placed in service approach.  The option to imply a time restriction and release the restriction over a long-lived asset’s life will not be permitted.

• What can you do?  Upon implementation, contributions restricted for long-lived assets (ex. buildings) will need to be released when the asset is placed in service.  For organizations that are releasing restricted contributions over the life of long-lived assets, the amounts will be need to be reclassified to net assets without donor restrictions (unrestricted) at the beginning of the new ASU adoption year (2018 or fiscal year 2019). 

Transparency and utility of liquidity information.  Currently no information is required on an organization’s liquidity.  The new ASU requires both quantitative and qualitative information on how the organization will meet its cash flow needs for operations within one year from the balance sheet date.

• What can you do?  Determine which of your financial assets are available for operating expenses for use within one year of the balance sheet date.  Examples include cash and cash equivalents, accounts receivable, operating investments, promises to give, distributions from beneficial interests, or distributions from endowments.  Assets restricted for specific purposes and not available for general operations would not be included in this amount.  For example, promises to give for the purchase of a fixed asset or specific program, donor restricted endowment funds or board designated endowments.
• Develop a liquidity management plan.  For example, the organization maintains financial assets on hand equal to sixty days of operating expenses, the board designates a portion of any operating surplus to its operating reserve, and the organization has a line of credit which allows borrowings up to $xxx,xxx.

Presentation of investment expenses.  External and direct internal investment expenses will be netted against investment income on the face of the statement of activities.  Disclosure of the components of investment expenses will no longer be required.

• What can you do?  Determine external and internal investment expenses.  Direct internal investment expenses include salaries, benefits and other costs associated with staff who are responsible for the execution of the organization’s investment strategy, monitoring the organization’s investment position or any other activities that assist in generating investment income.  Costs that are not directly related to investment income generating activities should not be included.  These include expenses such as the bookkeeper’s salary who records the investment activity or the management of an endowment that are not associated with generating an investment return.  

Expenses classified by function and nature.  An analysis of expenses by both function and natural classification will be required for all nonprofits on a separate statement (statement of functional expenses), on the face of the statement of activities or in the footnotes.  Additional disclosures will also be required for the methodologies used to allocate costs. 

• What can you do?  Implement a policy for reasonably allocating expenses between programs, management and general, and fund raising.  You may need to do a time study to properly allocate salaries and related costs.  Occupancy related expenses (ex. depreciation, utilities, maintenance) are normally allocated based on square footage. 

Presentation of cash flow information.  Either the direct or indirect method may be used for the statement of cash flows.  The indirect method reconciliation will no longer be required if the direct method is used.   

• What can you do?  If you currently use the indirect method but feel the direct method would be more useful to the users of the financial statements, you can change to the direct method.

Posted by: Carrie Minnich, CPA

Posted in Mission Minded Nonprofits

Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.