Rule Change: New Mandates For Booking Net Assets

By Joan Benson

The Financial Accounting Standards Board’s (FASB) much anticipated Accounting Standards Update (ASU 2016-14): “Presentation of Financial Statements of Not-for-Profit Entities,” impact all nonprofits. It is geared toward improving nonprofit financial statements and to provide more useful information to stakeholders.

It is the first of a two-phase project intended to strengthen clarity, transparency, and consistency in nonprofit financial reporting. The effective date for Phase One is annual financial statements issued for fiscal years beginning after Dec. 15, 2017, and for interim periods within fiscal years beginning after Dec. 15, 2018. You can view the complete standard on the FASB website.

Highlights of Changes Related to Net Assets: Nonprofits currently utilize three classes of net assets — Unrestricted; temporarily restricted; and, permanently restricted. These will now become two classes: Net assets with donor restrictions; and, Net assets without donor restrictions.

Footnote disclosures will be required to include the timing and nature of the restrictions, as well as the composition of net assets with donor restrictions at the end of the period.

Part of the associated changes to net asset classifications will include a change to how underwater endowments are handled. Under the new guidelines, these assets (that have a current value that is less than the original gift or required to be retained amount) will now be classified as “net assets with donor restrictions.” Board-designated net assets will now require disclosure of amounts and purposes. Additional disclosures related to these assets will also be required.

Nonprofits currently can recognize the expiration of a donor restriction over time, but under new guidelines, they will need to reclassify net assets with donor restrictions that are used to acquire or construct long-lived assets as “net assets without donor restrictions” when the asset is placed in service.

Changes to Statement of Cash Flows: Nonprofits are required to provide an indirect reconciliation when using the direct method of presenting operating cash flows. With the new guidelines, nonprofits will be able to select the presentation method that best serves the entity, and no reconciliation will be required.

Highlights of Changes Related to Statement of Activities: With the new FASB guidelines, nonprofits will need to present the amount of change in each of the two new classes of net assets and the total net assets. They will need to present two subtotals of operating activities that each correspond with changes in net assets without donor restrictions. All nonprofit orgs will now have to provide information about their operating expenses by both nature and function and include enhanced disclosures about their methods of allocating costs among the different functions. A ‘net presentation’ of investment expenses against investment return will be required on the face of the statement of activities.

Transparency/Liquidity: Additional/enhanced qualitative and quantitative information will be required, on the face of the balance sheet or in the notes – to report on spendable financial resources.

Coming Soon: Phase 2 of the FASB’s nonprofit project will be focused on addressing additional issues such as Operating measures and alignment of measures between your Statement of Activities and Statement of Cash Flow. Additional resources for more information on ASU 2016-14 can be found at: AICPA Not-for-Profit; FASB; and, the Journal of Accountancy.

Joan Benson is senior product marketing manager for Intacct. Her email is [email protected]