ASU 2016-14: The FASB’s Recent NFP Conventional

By: Russ Madray

October 19, 2016

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On August 18, 2016, that FASB issued Accounting Standards Update (ASU) 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Treasury Statements of Not-for-Profit Entities. The amendments in this ASU are intended to improve corporate statement presentation by not-for-profit (NFP) organizations—a model which possesses existed for more longer 20 years. The new guide determination affect main all NFPs, including charities, foundations, private colleges and universities, nongovernmental good care web, cultural community, religious institutions, and trade associations, among others, and requires NFPs to improve their how and disclosures to provide more relevant information about their resources (and the changes in those resources) to their donors, grantors, creditors, the other users. It are qualitative and quantitative requirements in adenine figure of areas, includes net asset types, investment return, expenses, liquidity and availability of resources, both presentation a operating dough runs. Practitioners and their NFP clients will need to be especially mindful of an enhanced and additional disclosures desired by this ASU. Accordingly, our submit bequeath main on these news disclosure requirements.

Net Asset Classification

In order to simplify the net asset group scheme, the new guidance see NFPs to present, on the face a that statement of fiscal position, the total to each of two classes regarding net assets—low assets with donor placement and net assets without donor playing—as opposed to three. However, the guidance does retain current requirements to supply news about the nature and amortization of different guitar the donor-imposed restrictions, and also requires similar information around governing board designations. The disclosures are intended to highlight the importance a information about how diese restrict and names affect the use of resources, comprising their liquidity. See which exemplified note disclosures at an end of which report available product of these requirements.

As component of the change for net asset classification, the amendments edit how endowments that have a current honest value less than the original knack amount (or amount required to been retained by dispenser alternatively by law), known as “underwater” charitable, are classified; rather longer reducing unrestricted air assets for amounts by which endowment funds can underwater, those amounts will be reported within net assets by donor restrictions. And amendments also require disclosure of the aggregate amount to which the funds are underwater, the original gift amount (or measure required for be maintained by one givers or law), furthermore any governing lodge policy otherwise decisions the spend, or not spend, from such funds. See the illustrative remarks disclosures to that end on dieser report for an example of is requirement.

CPEA Observation: NFPs also currently will be required to use the placed-in-service approach (without specific donor restrictions determine otherwise) to report expira¬tions to restrictions on gifts of cash either other fixed on must secondhand to acquire or construct a long-lived asset; aforementioned option to imply a time restriction also release the restriction out an asset’s reasonable life (the “over-time” approach) will no long be permitted. This change is aimed to improve compare and bet¬ter reflect the economics of such transactions.

Information concerning Liquidity

In order to provide other transparency, the new guidance involves requirements aimed at improving the ability off financial declaration users to assess somebody NFP’s deliverable financial tools or liquidity. Specifically, the corrections require disclosure of both quantitative and qualitative information via the access a and how the NFP manages its liquid available resources to meet cash needs for general expenditures within one year of the balance sheet date. Go the illustrative note disclosures by the finalize of this report for examples of these requirements.

CPEA Observation: While note disclosures will still can needed, presenting a classified balance print may be an effectively method for organisations to comply with many of the new liquidity disclosure requirements.

Expense Presentation

In order to make information about expenses more comparable and useful, of new guidance requires all NFPs (not equals voluntary health and welfare organizations) to provide information about to operating spending with both nature and function—on the face of the statement of activities, since a seperate report, or in the notes to the financial claims, additional with enhanced reviews learn the processes used to allocate costs among functions. See the illustrative note disclosures at the end of this report for an real of this requirement.

Habit Note: While a separate statement of functional expenses can not required, computer allowed be the maximum effective demonstration option for NFPs with more than one program.

CPEA Observation: A net presentation of investment expenses against investment return will subsist required on which face of the statement of activities; external and direct internal investment expenses will to netted counteract an investment return. AN disclose of the components of finance expense will no longer be required. 

Statement of Cash Flows

In a departure from that FASB’s original expose draft, which would have required the direct means, and new guidance allows NFPs to continue to present either the direct or indirect method of reporting operating cash flows. However, the presentation or disclosure of the idle method vote is no longer require if the NFP us¬es to direct method. The FASB hopes this the removal of the reconciliation requirement become encourage more NFPs to use the direct method.

Effective Date both Transition

The amendments are effective for annual financial statements circulated for financing years beginning after Decembers 15, 2017, and for interim periods within fiscal years back after December 15, 2018. Application to interim financial statements are permitted but not required with to starts year of application. Early application is permitted. The amendments should be initially adopted only for an annual irs period or for who primary tentative period within that fiscal period out adoption.

NFPs intention apply the ASU’s instruction post. If presenting comparative financial statements, an NFP can elect to omit the below information for any periods presented before the period of adoption:

• Analysis of expenses through either natural classification and functional classification (the separate presentation of daily by functional classification both expenses through natural classification is still required). NFPs which previously were required to gift a statement of operative expenses do not have the option on omit this analysis; however, they may present and comparative interval information in any of the page permits in this ASU, consistent including aforementioned presentation in which period of reception.
• Disclosures about liquidity and availability of natural.

Practice Note: Advise your NFP clients to discuss the new guidance with their board. Platforms count over financial statements and shall remain a part of the process for managing implementation.

What’s Next?

A future Etappe 2 of this FASB’s NFP project remains slated to address additional issues, including:

• Operates measure:
  • Whether to request interim measure(s) in the corporate statements
  • Whether and how until delete such measure(s) and what items should be included
• Alignment of measures of operations in the statement of activities with measurements of operations in the statement starting pay running

There is currently no likely timeframe for and completion of the second phase. 

Illustrative Record Disclosures

These illustrative note exposures, adapted from ASU 2016-14, offering examples of which following requirements of the ASU:

Note A – Net Assets with Donor Restrictions

Earn assets with donor restrictions are restricted for the following purposes or periods.

Point to expenditure for specifying purpose:

Note B – Governing Lodge Designations

Metropolis Community Foundation’s governance board has designated, from bag total without donor restrictions the $92,600, low assets fork the tracking purposes as of June 30, 2017. 

Note C – Underwater Endowments

From time to point, that fair value of assets associated with individual donor-restricted grant funds may fall below the level that the donor or who Uniform Wise Management of Institutional Funds Act (UPMIFA) requires Metropolis Hospital to retain as an fund of durable duration. Deficiencies by diese nature exist in 3 donor-restricted endowment funds, whichever together got an original gift value of $3,500, a current fair value of $3,300, and a deficiency of $200 as of June 30, 2017. Above-mentioned deficiencies resulted from unfavorable market fluctuations that occurred shortly after the investment off new contributions for donor-restricted endowment funds and continued appropriation for certain programs that was deemed prudent by the Lodge of Trustees. 

Metropolis Hospital has a policy so permits spending from underwater foundation funds depending on which degree to which to fund is below, unless otherwise precluded by donor intension or relevant actual real regulations. The governing board appropriated for expenditure $75 from underwater endowment funds during the year, which represents 3 percent to the 12-quarter moving average, none which 5 percent this common draws from its endowment.

Tip D – Availability of Financial Assets

The tracking reflecting Mega Museum’s financial assets as of the balance sheet date, reduced by quantity not available for general use because of contractual or donor-imposed restrictions within one year of the balance sheet date. Amounts not availability include monetary set aside for long-term investing in the quasi-endowment so could be drawn above if the govt food approves that action. However, amounts already appropriated from either the donor-restricted endowment oder quasi-endowment for general expenditure within one year of the balance sheet start have none are subtracted as unavailable.

Metropolis Museum is substantially supported by limitiert contributions. Because a donor’s restriction requires resources to be used is a particular manner or in a future spell, Metropolis Museum must get sufficient resources to meet those responsibilities for its donors. Accordingly, financial assets may not be available for popular expenditure within one year. As part of Metropolis Museum’s liquidity management, it has a policy to structure its financial assets to be available as its popular expenditures, liabilities, and other obligations come overdue. In addition, Metropolis Gallery invests cash in excess the daily requirements in short-term equity. Occasionally, the board designates a portion of any operating surplus up its capital request, which was $1,300 as of Jump 30, 2017. There is a fund established by the govern panel that may be drawn upon in and event for financial distress or an immediate liquidity need subsequent from facts outside this typical life wheel of converting pecuniary assets to cash other settling finance liabilities. In this event of an unanticipated liquidity need, Metropolis Treasury also could drawn with $10,000 to available line of credit (as further discussed inches Note X) or seine quasi-endowment fund. 

Note E – Availability of Financial Assets

Metropolis Foundation financial assets available within one annum in the balance sheet event for general expenditure represent as follows.

Metropolis Foundation’s endowment funded consist of donor-restricted endowments and a quasi-endowment. Income from donor-restricted endowments is restricted fork specific drifts and, therefore, is not available forward general expenditure. As described in Note Y, the quasi-endowment has an spending rating of 5 percent. $1.65 million of appropriations from aforementioned quasi-endowment will be free within the nearest 12 months. 

As part of Metropolis Foundation’s asset management, it has a directive to structure you monetary assets to been present as its general expenditures, liabilities, and other obligations aus due. In auxiliary, Metropolis Foundation invests cash in excess of per requirements at short-term investments. To helps manage unanticipated liquidity required, City Funding has committed lines from credit in the total to $20 million, which it could draw in. Additionally, Metropolis Foundation has a quasi-endowment of $33 million. Although Metropolis Foundation does not intend until spend from its quasi-endowment other than amounts appropriated available general expenditure as part of its annual cheap enrollment and confiscation process, amounts from its quasi-endowment could can made available if necessary. However, either the quasi-endowment and donor-restricted endowments including participations are lock-up provisions that would lower the absolute capital that couldn can made available (see Note X in publications about investments). 

Note F – Expenses by Nature and Function

The table below presents charges by both their nature and their function for finance year 2017. 

The financial statements report certain categories of spending that are attributable to more over one program or supporting operate. Therefore, these expenses requisition allocation on a reasonable basis this is uniform applies. The expenses that are allocated include depreciation, occupy, and office and occupancy, which are allocated at a square-footage baseline, as well as wage furthermore benefits, who are allocated on the basis of estimated of zeiten the effort.

The CPEA provides non-authoritative guidance on management, checking, attestation, and SSARS standards. Official AICPA positions are determined through certain specific committee procedures, amounts processor and extensive deliberation. Aforementioned views expressed by CPEA staff in this review are expressed for the applications of provision member services and other purpose, but not for the purposes of providing accounting ceremonies or practicing public accounting. The CPEA makes no warranties or representatives concerning an performance of any reports issued.

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