Presentation of Financial Statements of Not-for-Profit Entities ASU - - PowerPoint PPT Presentation

Presentation of Financial Statements

• f Not-for-Profit Entities

ASU 2016-14

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Purpose of ASU 2016-14

• First phase in a two phase project to improve the

usefulness of NFP financial statements for donors, creditors and other users of the financial statements

• Addresses the following:

– Complexities related to the current use three classes of net assets – Transparency and usefulness of information related to liquidity and availability of cash – Inconsistencies in the type of information provided about expenses – Flexibility in preparing the statement of cash flows

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What’s changed?

• New liquidity and availability disclosures required
• Net asset classes reduced from three to two
• Additional disclosures for underwater endowments
• All NFPs must

– report expenses by nature and function in one place – and describe the methods used to allocate among functional categories

• Net investment return replaces other alternatives
• NFPs who choose the direct method of cash flows no longer

have to perform a reconciliation with the indirect method.

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Entities affected by the proposed ASU

• Public charities
• Private foundations
• Private colleges and universities
• Nongovernmental health care providers
• Religious organizations
• Trade organizations

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Effective date and transition

• Effective date:

– Fiscal years beginning after 12/15/2017 (e.g., calendar year 2018

• r fiscal year 2018-19)

– Early adoption permitted but must apply transition provisions

• Transition

– For year of adoption: apply all provisions. – For comparative years presented: apply all provisions, except can choose not to present:

• Analysis of expenses by nature and function*, and/or
• Disclosures around liquidity and availability of resources

*unless already required to do so under current GAAP

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Net asset classifications

Unrestricted

• Temp. Restricted
• Perm. Restricted

Without Donor Restrictions* With Donor Restrictions* Amount, purpose, and type of board designations** Nature and amount of donor restrictions

Current GAAP Revised GAAP + Disclosures * NFPs may choose to disaggregate further ** New disclosure requirement

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Net asset classifications (continued)

• Two classes

– With donor/grantor-imposed restrictions; and time restrictions

• Includes perpetual and temporary

– Without donor/grantor-imposed restrictions

• Includes board-designated

EXAMPLE

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Net asset classifications (continued)

• Eliminates the option to imply a time restriction on long-lived

assets, in favor of releasing the restriction when the asset is placed in service

• Disclosure requirements

– Composition of net assets with donor/grantor restrictions – Emphasis on how/when resources (net assets) can be used

• Specified purpose(s)
• Specified time(s)
• Perpetual (endowment, i.e., “funds of perpetual

duration”) – Quantitative and qualitative information about board designations

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Implementation considerations

• Determine whether you will need to adjust your tracking mechanism

(g/l, spreadsheet, etc.) to accommodate the new terminology and presentation.

• Determine whether in-service long-lived assets have implied time

restrictions that will need to be released upon adoption of the ASU.

• Determine the appropriate presentation among net assets:

– without donor restrictions – with donor restrictions that will be satisfied over time and/or expenditure – maintained in perpetuity

• Decide what to present on the face of the financials vs in the notes.

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Implementation considerations (continued)

• Assemble information about the amounts and purposes of board

designations of net assets without donor restrictions. – For presentation in notes and/or on the face of the Statement of Financial Position

• Determine proper presentation of any board-designated

endowment funds in the related endowment note.

• Draft language to include in the liquidity and availability note.

– Self-imposed limitations on board-designated funds – Conditions under which such funds would be made available to meet expenditure needs

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Underwater endowments

• An endowment is “underwater” if the current fair value is less than

the original gift amount

• Currently, unrestricted net assets would be reduced by the amount

by which an endowment fund is underwater

• Underwater amount is included within net assets with donor

restrictions under new guidance

• New guidance also requires disclosure of the aggregate amount by

which the fund is underwater, the original gift amount (or the amount required to be maintained by the donor or law), and any governing board policy or decisions to spend, or not to spend such funds

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Underwater endowments (continued)

• New disclosure requirements:

– Interpretation of the NFP’s ability to spend from underwater endowment funds – NFP’s policy, and any actions taken during the period, concerning appropriation from underwater endowment funds – For each period presented – each of the following, in the aggregate, for all underwater endowment funds:

• 1)

The fair value of the underwater endowment funds

• 2)

The original endowment gift amounts (or level required to be maintained by donor stipulations or by law that extends donor restrictions)

• 3)

The amount by which the original gift amounts exceeds the fair value (the deficiency = 2 less 1)

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Implementation considerations

• Change your endowment note to conform to the new two-net-

asset categories presentation.

• For underwater endowments, determine:

– The fair value of underwater funds – The original gift amount or level required by donor stipulations or law that extends donor restrictions – The aggregate amount of the deficiencies of each underwater fund

• Note: Underwater portion of endowments now presented

entirely in funds with donor restrictions.

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Net investment return

• Presented on a net basis, with all external and direct internal

investment management and custodial expenses netted against the return

• No longer required to report investment income components and

related expenses separately

• Internal expenses include the direct conduct or direct supervision of

the strategic and tactical activities involved in generating investment return – Salaries, benefits, travel, and other costs, including allocable internal costs relating to oversight of external management firms – Excludes costs not associated with generating investment return

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Programmatic investments

• Guidance in ASU 2016-14 is not applicable to programmatic

investments – Programmatic Investing: Making loans or other investments directed at carrying out an NFP’s purpose for existence

• Example: loans made to lower-income individuals to

promote home ownership

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Implementation considerations

• Report external and direct internal investment expenses as a

component of net investment return.

• Exclude those expenses from the presentation of expenses by

nature and function.

• Establish procedures to accumulate any external and direct internal

investment expenses to be netted against investment return.

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Liquidity

• New guidance provides information about the NFP’s available

resources and liquidity

• NFP’s will be required to disclose both quantitative and qualitative

information about the availability of resources and how liquid resources are managed to meet liquidity needs within one year of the balance sheet date

• Good Idea – Many of liquidity disclosure requirements may be met

by presenting a classified balance sheet. However, other note disclosures would still be needed

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Implementation considerations

• Identify all financial assets and any limitations on availability for

expenditure in the next 12 months

• Determine the format to present the required quantitative disclosure of

liquidity information – Display gross amounts of financial assets, then adjustments to arrive at available for expenditure amounts, or – Display only the net amounts available for expenditure

• Availability is affected by nature of the asset, external limitations imposed

by donors, contractual agreements, and board designations

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Implementation considerations (continued)

• Determine whether presenting a classified statement of financial

position (SOFP) could enhance or simplify the quantitative disclosure requirements (considering other effects elsewhere in the FS and notes)

• Review the organization’s policy or develop a formal policy for

managing the organization’s liquidity needs – Will be disclosed in the qualitative portion of the note disclosure

• Draft the note disclosure describing how the entity manages its

liquid assets and liquidity needs. This includes: – conditions under which certain board-designated net assets may be undesignated – access to the lines of credit or other financing sources – any other information useful in understanding the entity’s liquidity

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Functional expenses

• All NFPs will be required to report operating expenses both by

function and by nature in one location – Include in the statement of activities – Present a separate statement – Present a table in the notes to the financial statements

• Enhanced disclosures about the methods used to allocate costs

among functions

• Good Idea – A separate statement of functional expenses is an

effective presentation for NFP’s with more than one program

STATEMENTS OF FUNCTIONAL EXPENSES FOR THE YEARS ENDED DECEMBER 31, 20XX AND 20XX

20XX Program Services Management and General Fundraising Total Grants $ 1,617,000 $ 105,000 $

• $ 1,722,000

Salaries and benefits 1,285,000 16,000 531,000 1,832,000 Education and awareness 706,000 54,000 245,000 1,005,000 Occupancy 203,000 30,000 72,000 305,000 Professional services 120,000 48,000 45,000 213,000 Printing 137,000 1,000 74,000 212,000 Information technologies 15,000 4,000 35,000 54,000 Travel 79,000 1,000 11,000 91,000 Depreciation 44,000 6,000 13,000 63,000 Other 80,000 18,000 113,000 211,000 $ 4,286,000 $ 283,000 $ 1,139,000 $ 5,708,000

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Statement of cash flows

• NFPs may present cash flows from operations using either the direct
• r indirect method (consistent with current guidance)
• The indirect method reconciliation will no longer be required if the

direct method is used

• Provides flexibility allowing an organization to select the

presentation method that best meets the needs of the organization and the users of the financial statements

• Look for more changes in phase 2

Questions?