New Presentation Rules for Donor Restrictions
For those of us that have been around awhile, we remember the sweeping changes brought about by Financial Accounting Standards Board (FASB) 116 and 117. For the first time, nonprofit organizations were required to report net assets as unrestricted, temporarily restricted, or permanently restricted, and the entire financial statement presentation was overhauled. These sweeping changes occurred in 1995, and although some new accounting standards have affected nonprofits since then, none have been overly burdensome. That is, until now. With the issuance of Accounting Standards Update (ASU) 2016-14, nonprofit financial statements will again be altered significantly. The ASU is effective for all 12/31/18 year-ends, so it’s time to start preparing your organization for the upcoming changes. This article will be the first of four discussing the upcoming changes to nonprofit accounting and financial presentation rules.
One of FASB’s goals with ASU 2016-14 was to improve the net asset classification scheme. Current rules require financial statement presentation of unrestricted (including designated and undesignated), temporarily restricted, and permanently restricted net assets. Some financial statement users felt this terminology was confusing. As a result, financial statements will now present two classes of net assets instead of three – with donor restrictions and without donor restrictions. The visual below assists in understanding how this transition will work.
So, does this mean you can quit tracking donor restricted net assets based on whether they are permanently or temporarily restricted? Unfortunately not! As donors require funds to be spent for specific purposes, within specific time periods, or maintained for perpetuity, nonprofits will still need to honor those requests and track them accordingly. Because of this, your internal accounting for donated funds will not change, and the implementation of ASU 2016-14 will mostly be presentation changes within the external financial statements. Here are some additional tips to keep in mind:
- Organizations may choose to further disaggregate the two classes of net assets on the face of the statement of financial position. For example, when presenting net assets with donor restrictions, management may choose to present purpose restrictions, time restrictions, and funds of perpetual duration (i.e. endowments).
- If the classes of net assets are not disaggregated on the face of the financial statements, then additional disclosures will need to be made in the notes to explain the composition of donor restricted net assets. This disclosure will likely be in more detail than what was previously disclosed.
- Although most entities already made these disclosures, an explicit requirement now exists to disclose the nature and amounts of designations included in net assets without donor restrictions.
- Underwater endowment funds will now be reported as part of net assets with donor restrictions. Previously, such amounts were considered unrestricted net assets, and operating dollars had to cover the deficiencies. Several disclosures are required in this situation, to include policies for spending underwater endowment funds, original gift amounts, and the amount of the deficiency.
- With the requirement to only present two classes of net assets instead of three, a comparative presentation may be easier to accommodate and could provide more useful information to readers of the financial statements.
- In a comparative presentation, you will be required to restate the prior year financial statements as well.
So, how do you prepare for implementation of this portion of ASU 2016-04? Consider the following:
- Visit with your auditors on the various presentation options. Several examples have been published that can provide you with a visual.
- Determine if you want to implement any of the terminology and presentation changes in your chart of accounts or internal board reporting.
- Formal policies and procedures should be in place that guide the establishment of board-designated net assets, whether management has been delegated any authority to designate net assets, conditions under which designations may occur, and how such designations will be released in the future. The board of directors should formally approve all existing designations before year-end if not previously done.
- If your organization maintains endowment funds, policies should be in place that address actions to take when a fund is underwater and when appropriations can be made from these funds. If you do not have information on original gift amounts in your endowment funds, you will want to start gathering this information.
- Budget additional consulting and auditing fees for your 12/31/18 audit – additional time will be necessary to implement this new standard.
Watch for future articles on additional provisions of this new standard that will apply to your organization. The nonprofit experts at Ketel Thorstenson, LLP are here to help you navigate the intricacies of ASU 2016-14. Call us at 605-342-5630 to set up a meeting now.