The ASU requires a change in the presentation of temporarily and permanently restricted net assets to a single classification of net assets with donor restrictions. This change is designed to reduce complexity and increase understandability of this information. The ASU also requires enhanced disclosures that show the detail of net assets with donor restrictions at the end of the reporting period as well as how the restrictions affect the use of the resources. This additional information must be presented in either the face of the statement of financial position or in the footnotes to the financial statements. The FASB believes that the expanded presentation about various types of restrictions would provide more information than the current aggregated summaries of the total temporarily and permanently restricted net assets presentation and disclosures currently provided to readers of the financial statements.
The previously categorized unrestricted net assets will now be referred to as net assets without donor restrictions. The terminology change is seen as a refinement since the use of the term unrestricted net assets implies that the assets are not subject to any restrictions. However this category of net assets is oftentimes subject to restrictions resulting from laws, regulations, and other terms and conditions of bond agreements and other contracts. This change in terminology will more clearly show that these net assets are not subject to any donor restrictions but can in fact be subject to restriction by these other arrangements or parties.
The presentation of net assets with donor restrictions will encompass both the categories previously titled temporarily and permanently restricted net assets with the goal of streamlining this presentation to show all assets with donor restrictions. This category includes funds received with restrictions from both donors and grantors. There has been a lot of confusion in the past surrounding the classification between temporarily and permanently restricted net assets, and this change aims to eliminate this confusion. The use of the term with donor restrictions is a heading, and an entity can maintain subcategories under this heading, as they feel necessary to clearly portray their net assets. The disclosures for net assets with donor restrictions should clearly state the nature, purpose, and amount of the donor restrictions so that a reader can fully understand the nature of the restrictions.
The ASU requires additional information to be disclosed either on the face of the statement of financial position or in the notes to the financial statements regarding the various types of board-designated net assets. These are net assets without donor restrictions that the nonprofit's board imposes limits on for specified purposes. This change will assist nonprofit entities in showing how they are managing their resources. The purpose of the board-designated net assets is now required to be disclosed in the footnotes. The FASB also believes this will help nonprofit entities clarify their financial condition and results.
Under the ASU, the amount that a donor-restricted endowment fund is underwater will now be presented as part of net assets with donor restrictions. The term underwater endowments refers to the situation in which the fair value of the assets to be maintained in perpetuity measured at the financial statement date is less than the original gift or the level required to be maintained by the donor stipulation or law. The premise for the change in showing the underwater amounts as part of net assets with donor restrictions instead of as net assets without donor restrictions is due to changes in the enacted version of the Uniform Prudent Management of Institutional Funds Act (UPMIFA) that allows spending, within the guidelines of prudence, from an underwater endowment fund. The FASB believes that the presentation of the entire amount of an endowment fund as donor restricted, whether underwater or not, is consistent with current laws. FASB also believes that keeping the full endowment in one place reduces the complexity of this information and thereby makes the information on endowment funds easier to understand.
The disclosures related to underwater endowments will continue to include the aggregate amounts by which funds are underwater as in current accounting principles generally accepted in the United States of America (U.S. GAAP). The disclosures, however, will also include the aggregate of the original gift amounts for such funds, fair value, and any governing board policy or decision to reduce or not spend from these funds.
The ASU will require that nonprofits use the placed-in-service approach to recognize gifts of cash restricted for acquisition or construction of property, plant, and equipment in the absence of a specific donor stipulation to the contrary. This change will assist in reducing the diversity in practice currently seen in nonprofit financial statements. Before the ASU, a nonprofit could recognize a gift over the implied time restriction related to the gift and recognize revenue as they depreciated the asset if this was their policy. Upon adoption of ASU 2016-14, this option has been eliminated unless the donor specifically states a period of time that the contributed asset must be used. This is the only provision in the ASU that changes the accounting (recognition and measurement). All other provisions in the ASU are presentation changes only.
Nonprofits will be required to provide an analysis of expenses that shows expenses detailed by nature and by function. Nonprofits have the option to present this information in the statement of activities, a separate statement, or in the footnotes. If the entity chooses to present the analysis in a separate statement, it must be presented as part of the basic financial statements and cannot be presented as a supplemental schedule to the financial statements. The analysis component requires that expenses be shown disaggregated by function and nature. Most nonprofits are currently required to show expenses by function either on the face of the statement of activities or in the footnotes. Currently under U.S. GAAP, only voluntary health and welfare organizations are required to include a separate statement of functional expenses that shows expenses by function and natural classification. Under the ASU all nonprofit entities will be required to provide this analysis of expenses.
Organizations may want to take this opportunity to revisit how they have defined their programs (functions) and assess whether any activities should be combined. If an entity has a large number of programs, the analysis of expenses may become overwhelming to the readers of the financial statements.
Nonprofits will also be required to provide disclosures about the methods they use to allocate costs among the program and supporting services. None of the changes in the ASU with regard to the allocation of expenses changes U.S. GAAP related to the accounting for and disclosure of joint cost activities.
To address issues with diversity in practice with the comparability of the investment return presentation, the ASU will now require nonprofits to present only the net investment return on the face of the statement of activities. The investment expenses that should be netted against investment return are limited to external investment expenses incurred and direct internal investment expenses. External investment expenses are those that are reported to the nonprofit by their external money managers and other external investment management firms related to the management of the investment portfolio. Direct internal investment expenses are defined in the ASU as those that “involve the direct conduct or supervision of the strategic and tactical activities involved in generating investment return.” These can include, but are not limited to, salaries of officers, and other staff responsible for the development and execution of the investment strategy and allocable costs associated with internal investment management and supervising of the external investment firms. Direct internal investment expenses do not include items that are not associated with generating investment return such as accounting staff costs associated with reconciling and recording investment transactions.
The amount of investment expenses will no longer be required to be disclosed. The disclosure of investment income components, such as interest and dividends, realized gains or losses, and unrealized gains or losses, will also no longer be required in the footnotes. If the presentation of this information is still seen as useful by an entity, however, it can choose to continue to disclose this information.
The ASU requires new disclosures to assist readers in assessing a nonprofit's liquidity and providing information on the availability of the nonprofit's assets to meet operating needs. A nonprofit will be required to disclose qualitative information (i.e., lines of credit and reserves) on how the entity manages its liquid available resources and its liquidity risk in their footnotes. A nonprofit will also have to provide quantitative information that communicates the availability of the entity's current financial assets on the date of their statement of financial position to meet the cash needs for general expenditures within one year of the date of the statement of financial position. The information on the availability of assets can be presented on the face of the financial statements or can be disclosed in the footnotes.
The ASU provides for some additional disclosures for those nonprofits that currently present an operating measure in the statement of activities and show governing board designations, appropriations, and similar actions such as internal transfers in this measure. The nonprofits with these scenarios must report these types of internal transfers appropriately disaggregated and described by type. This information can be provided either on the face of the financial statements or in the footnotes. This is designed to assist readers of the financial statements in understanding the impact these designations, appropriations, and transfers have on the operating measure presented.
The ASU will continue to permit nonprofits to choose between using the direct method or the indirect method of presentation for the cash flow statement. The direct method reports major classes of gross cash receipts and gross cash payments in the statement. The indirect method reports information related to the cash activities by adjusting the change in net assets for all noncash transactions and the changes in the assets and liabilities of the entity.
If an entity chooses to use the direct method of presentation, the separate reconciliation between the net change in net assets to cash flows from operating activities is required under current U.S. GAAP. The ASU will no longer require this reconciliation for those entities that choose the direct method of presentation.
A nonprofit is permitted to incorporate many of these changes in its financial statements without adopting the full ASU.
An entity can implement the following provisions of the ASU at any point before the formal adoption:
A nonprofit can implement the following provisions of the ASU only upon adoption of the full ASU:
The main provisions of the ASU address the presentation of information in nonprofit financial statements and the related disclosures regarding certain items. Two changes mandated in the ASU that could have a potential accounting effect on the financial information presented are as follows:
If entities have these scenarios, they have to calculate the effect on the earliest financial period presented and adjust the financial statements for the financial impact in all periods presented in the financial statements.
ASU 2016-14 will be effective for nonprofit organizations' financial statements for fiscal years beginning after December 15, 2017, and for interim periods within fiscal years beginning after December 15, 2018. This means that all nonprofits with calendar year-ends will have to present their financial statements in accordance with the ASU for the first time in their December 31, 2018, financial statements. Nonprofits with fiscal year-ends would need to present their financial statements in accordance with the ASU for their respective year-ends in 2019. An entity has an option to adopt the provisions of the ASU early. If an entity chooses to adopt the provisions of the ASU early, they must apply all the provisions of the ASU in their statements presented in the year of adoption.
When an entity adopts the provisions of the ASU, it should be done on a retrospective basis for all years presented. This means that the changes in the ASU need to be applied to both the earlier year(s) and the current year presented in the financial statements. However, if an entity presents comparative financial statements that show an earlier year, the organization would have an option to omit the following information for any years presented before the year of adoption:
If this option is selected, the analysis of expenses and the disclosures of liquidity and availability of resources would have to be shown in the financial statements only for the year the ASU is adopted. If the nonprofit shows comparative financial statements, these items should be presented for all future financial statements for both years presented in years after adoption if the entity chooses to present a comparative financial statement.
The full ASU can be accessed on FASB's website at www.fasb.org.