New Accounting Standards Affecting Foundations Renée S. Graves, CPA, CGFM Community College Internal Auditors Spring Conference May 4, 2017 AGENDA • Introduction • Who is affected • How NFP accounting is improved • Overview of changes • Net Asset Classes • Underwater Endowments • Investment Return • Expense Reporting • Liquidity and availability of resources • Cash flow 1
INTRODUCTION • Update to the current model – not an overhaul • Improve understanding of net asset classes • Improve information in financial statements and notes: • Financial performance • Cash flows • Liquidity • Better enable NFPs to “tell their financial story” WHO IS AFFECTED BY THE NEW GUIDANCE Not-for-profit organizations that will be affected include: • Charities • Foundations • Colleges • Universities • Health care providers • Religious organizations • Trade association • Cultural institutions 2
HOW THE NEW GUIDANCE IMPROVES NFP ACCOUNTING • Improves communication of financial performance and condition to stakeholders • Reduces cost and complexities in preparing financial statements. • Simplifies the face of the financial statements • Enhances footnote disclosures • Provides more relevant information about resources and the changes in those resources HOW THE NEW GUIDANCE IMPROVES NFP ACCOUNTING Helpful to users, such as donors, grantors, creditors, and others in assessing a not-for-profits: • Availability of resources to meet cash needs for general expenditures • Liquidity and financial flexibility • Financial performance • Service efforts and ability to continue providing services • Execution of stewardship responsibility and other aspects of its management's performance 3
CHANGES TO NOT-FOR PROFIT FINANCIAL REPORTING • On August 18 th , 2016 the FASB issued a standard to improve: • How not-for-profit organizations classify net assets • How financial statements are presented • How liquidity, financial performance & cash flows are disclosed “The new FASB Standards represent the most significant changes to NFP reporting rules since 1993” CHANGES TO NOT-FOR PROFIT FINANCIAL REPORTING • After 20 years, stakeholders have voiced concerns: • Complexities in the use of the required three classes of net assets • Deficiencies in information needed to assess liquidity • Inconsistencies in information provided about expenses • Limited usefulness of the statement of cash flows 4
KEY PROVISIONS OF THE NEW STANDARD Net Asset Classes • Revised net asset classes into two classes • net assets with donor restrictions • net assets without donor restrictions • Improved disclosures for internal limits on the use of resources without donor restrictions • Improved disclosures of net assets with donor restrictions • Updated accounting and disclosure requirements for underwater endowment funds KEY PROVISIONS OF THE NEW STANDARD Investment Return • Net presentation of investment expenses against investment return on the statement of activities • No longer required to disclose investment expenses that have been netted Expenses • Required to present expenses by nature as well as function • Analysis showing the relationship between functional and natural classification for all expenses 5
KEY PROVISIONS OF THE NEW STANDARD Liquidity and Availability of Resources • Qualitative disclosure - how a not-for-profit manages its available liquid resources • Quantitative disclosure - the availability of financial assets to meet cash needs for general expenditures within one year Statement of Cash Flow • Free choice between direct and indirect methods • Presentation of the indirect reconciliation no longer required if using the direct method NET ASSET CLASSES • “Unrestricted” net assets was misunderstood • Can have internal limitations on use • Uniform Prudent Management of Institutional Funds Act (UPMIFA) blurred lines between temporarily restricted and permanently restricted • Underwater endowment information can help assess liquidity and availability of resources • Especially in depressed markets 6
NET ASSETS CLASSES Current GAAP ● Unrestricted ● Temp. Restricted ● Perm. Restricted Revised ● Without Donors Restrictions* ● With Donors Restrictions Disclosure ● Amount, Purpose, and type of board designations** ● Nature and amount of donors restrictions * Can disaggregate further ** New disclosure requirement NET ASSET CLASSES • Can disaggregate net assets classes on balance sheet With donors restrictions Perpetual in nature $XXX Purpose restricted XXX Time restricted only for periods after 20X1 XXX XXX Without donors restrictions: Designated by the Board [for purpose] $XXX Undesignated XXX XX Net assets $XXX • Streamlines the Statement of Activities • Allows for comparative reporting 7
NET ASSET CLASSES BOARD-DESIGNATED • The amount and purpose of board-designated net assets are disclosed either • on the face of the financial statements • in the footnotes • Requires an assessment of the financial implications before creating board designated funds. • Ensures the Board of Directors understands the financial reporting requirements NET ASSET CLASSES “UNDERWATER” ENDOWMENTS Revised net asset classification • To be reflected in net assets with donors restrictions rather than in net assets without donor restrictions Enhanced disclosures • Aggregate amounts by which funds are under water (current GAAP) • Aggregate amount of original gift amount (or level require by donor or law) • Fair value • Governing board policies, or actions taken, concerning appropriation from such funds 8
INVESTMENT RETURN Presentation • Net presentation of investment expenses against investment return on the face of the statement of activities • Netting limited to external and direct internal expenses • May report net return in multiple, appropriately labeled lines • From different portfolios • In different net assets classes • In operating versus non-operating Disclosure • Disclosure of investment expenses no longer required • If reported, carefully label and don’t include in expense analysis • No longer require disclosure of investment return components EXPENSE REPORTING • Analysis by both nature and function provides information about • Stewardship of resources • Fixed and variable costs • Report expenses on the face of the financial statements or in the footnotes by: • Function • Natural Classification • Analysis (disaggregate function by nature) • Requires disclosure of all expenses in one location (except netted investment costs) 9
EXPENSE REPORTING • Requires qualitative disclosures about methods used to allocate costs among program and support functions • Provides enhanced guidance on allocations from Management & General expenses: • Direct Conduct of programs or other supporting activities requires allocation from M&G • Direct Supervision of programs or other supporting activities requires allocation from M&G EXPENSE REPORTING • Required to provide enhanced disclosures about the method(s) used to allocate costs among program and support functions • Improved definition of management and general activities • Provides guidance on the types of costs that can be allocated among program and/or support functions and those that should not be allocated 10
EXPENSE REPORTING Program Activities Supporting Activities A B C Program Mgmt and Fund Supporting Total Subtotal General Raising Subtotal Expense Salaries and benefits $7,400 $3,900 $1,725 $13,025 $1,130 $960 $2,090 $15,115 Grants to other 2,075 750 1,925 4,750 4,750 organizations Supplies and Travel 890 1,013 499 2,402 213 540 753 3,155 Services and professional 160 1,490 600 2,250 200 390 590 2,840 fees Office and occupancy 1,160 600 450 2,210 218 100 318 2,528 Depreciation 1,440 800 570 2,810 250 140 390 3,200 Interest 171 96 68 335 27 20 47 382 Total expense $13,296 $8,649 $5,837 $27,782 $2,038 $2,150 $4,188 $31,970 LIQUIDITY AND AVAILABILITY OF RESOURCES • Current disclosures provide limited information • Feedback received on Exposure Draft was mixed: • Support for qualitative disclosures • Concern about implementation and audit costs • Separated liquidity and availability into two separate objectives: • Liquidity – qualitative disclosure of liquidity risk and management • Availability – quantitative disclosure using information on the balance sheet 11
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