Net Asset Reporting Under the New ASU 2016-14: Presentation of Financial Statements for Not-for-Profit Entities
Sarah G. Widlock
In an effort to provide more useful information to donors, grantors, creditors, and other users of the financial statements, the Financial Accounting Standards Board (FASB) released ASU 2016-14 Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not for Profit Entities on August 18, 2016. While the ASU focuses on five main areas that are changing, this blog will highlight just one—net assets.
Prior to the release of ASU 2016-14, net assets were classified as unrestricted, temporarily restricted and permanently restricted. Effective for calendar years ending December 31, 2018 or fiscal years ended June 30, 2019, the net asset classifications decrease from these three categories to only two categories entirely based on the existence or absence of donor imposed restrictions, specifically denoted as “without donor restrictions” and “with donor restrictions.”
Net assets without donor restrictions include all undesignated assets received by donors, as well as any assets designated by the organization’s Board of Directors, similar to what was previously considered unrestricted. Net assets with donor restrictions include all assets received with donor designated restrictions whether they are perpetual in nature, or purpose or time restricted. Previously, the classifications incorporated the nature of the donor imposed restriction by requiring the segregation of those assets restricted temporarily, or by purpose or time, and permanently, or those considered perpetual in nature. The update in the standard also requires detailed disclosures of the composition of net assets with donor restrictions as of the end of each period presented and how the restrictions affect the organizations resources, as well as the amounts and purposes of governing board designations, appropriations, and similar actions that result in self-imposed limits on the use of resources without donor imposed restrictions as of the end of each period. This can be done either on the face of the financial statements or in the foot notes of the financial statements.
In addition to the net asset classification changes, a couple of reporting options have been changed or eliminated with the release of the ASU.
For endowment funds, in the absence of explicit donor restrictions, the amount of the original gift and any gains or net appreciation of the fund are considered net assets “with donor restrictions” and are not to be available for expenditure, where as income from dividends and interest earned are available for expenditure. In the case of underwater endowments, the underwater portion is now required to be included as net assets with donor restrictions. It is also important to keep in mind that, whereas most of the disclosures for endowments have been simplified with this ASU, underwater endowments are an area where disclosures have actually been enhanced.
Also, in the absence of explicit donor restrictions, the ASU eliminated the over-time method of reporting the expiration of restrictions of capital gifts used to purchase or build long lived assets, such as buildings.
The aforementioned changes can affect the various defaults your organization uses while reporting contributions from donors without specific stipulations. It is important to remember these changes while discussing potential contributions with donors.
While some of the changes associated with this part of the ASU seem rather minor, it is important to begin to review your current listing of temporarily and permanently restricted net assets to see how the net asset classification changes will affect your organization. The accounting and related financial statement reporting for contributed assets with donor imposed restrictions can change from what has been reported previously and could potentially require prior period adjustments to conform to the new net asset classifications. It is also important to educate the users of your financial statements of these changes and how the changes in the defaults associated with the contributions of endowments and long lived assets can affect the use and reporting of those donations. We encourage you to reach out to your CPA or call us to discuss how this new standard affects your specific financial statements and any implications to the audit of your organization.
For more information, contact Sarah Widlock at firstname.lastname@example.org, or call her at 312.670.7444. Visit ORBA.com to learn more about our Not-For-Profit Group.