FASB’s New Not-for-Profit Accounting Standard

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Live Webinar:
Changes to NFP Financial Reporting
ASU 2016-14: Presentation of Financial
Statements of Not-For-Profit Entities
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Today’s Presenters
Jane Houle | Net@Work
Consulting Manager,
Nonprofit Solutions
Alison Fetzer | ORBA
CPA
James Quaid | ORBA
Director

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Net@Work Overview

Why Change?
• Reduce the complexities associated with the current three classes of net
assets
• Alleviate deficiencies in the transparency of information useful in
assessing an entity’s liquidity
• Reduce the inconsistencies in reporting of expenses
Who is affected?
• All NFPs and the users of their statements
ASU 2016-14: Presentation of Financial Statements of NFP Entities

Effective for fiscal years beginning after 12/15/2017
• Calendar Year End 12/31/2018
• Fiscal Year End 6/30/2019
In year of adoption, apply all provisions of ASU
Apply on a retrospective basis
• If comparative year presented can omit:
• Analysis of expenses by nature and function (except for Voluntary Health & Welfare
entities)
• Disclosures related to liquidity

Phase I
• Statement of cash flows
• Investment return presentation
• Net asset classes
• Expense reporting
• Liquidity and availability disclosures

Phase I

Statement of Cash Flows
A NFP may choose to report cash flows from operating
activities under either the direct or indirect method
• If the direct method is used, a reconciliation of the changes
in net assets from operating activities may be reported, but
is not required

Phase I

Investment Return Presentation
All NFPs are required to include a net presentation of
investment expenses against investment return on the face
of the statement of activities
Years ended June 30,
Without donor With donor
Restrictions Restrictions Total
Revenue:
Contributions and grants 500,000 100,000 600,000
Other revenue 125,000 125,000
Investment return, net 90,000 20,000 110,000
Net assets released from restrictions:
Satisfaction of purpose or time restrictions 70,000 (70,000)
Total revenue 785,000 50,000 835,000
2019

External Investment Expenses
Direct Internal Investment Expenses
• Involve the direct conduct or direct supervision of the
strategic and tactical activities involved in generating
investment returns
• Officer and staff responsible for the development and execution of
investment strategy
• Salaries, benefits, travel and other costs

Disclosures
• No longer required to report:
• investment expenses
• investment return components
• A NFP may present the amounts of net investment return
from portfolios that are managed differently or derived
from different sources as separate line items in the
statement of activities

Years ended June 30,
Without donor With donor
Restrictions Restrictions Total
Operating revenue, gains, and other support:
Contributions and grants 500,000 100,000 600,000
Other revenue 125,000 125,000
Investment return, net, appropriated for spending 90,000 20,000 110,000
Net assets released fromrestrictions:
Satisfaction of purpose or time restrictions 70,000 (70,000)
Total operating revenue, gains, and other support 785,000 50,000 835,000
Operating expenses: 612,000 35,000 647,000
Total operating revenues, gains, and other support
in excess of operating expenses 173,000 15,000 188,000
Other changes:
Investment return, net, in excess of amounts
appropriated for spending 15,000 5,000 20,000
Other 1,000 1,000
Change in net assets 189,000 20,000 209,000
2019

Phase I

Net Asset Classes
CURRENT – 3 Categories
• Net Assets
• Unrestricted
• Board designated
• Temporarily restricted
• Time
• Purpose
• Permanently restricted
• Endowments
UPDATE – 2 Categories
• Net Assets
• Without donor restrictions
• Undesignated
• Designated by the Board
• With donor restrictions
• Perpetual in nature
• Purpose restrictions
• Time-restricted for future periods

Net Asset Classes: Statement of Financial Position
Minimum Presentation
Alternative presentation
with disaggregation

Net Asset Classes: Statement of Activities – Example 1

Net Asset Classes: Statement of Activities – Example 2

Net Asset Classes: Disclosure
NOTES TO FINANCIAL STATEMENTS
June 30, 2019 2018
Restricted for purpose:
Educational programs 557,014$ 315,338$
Extracurricular activities 1,980,021 348,285
Other programs 56,306 136,879
Scholarships 3,046,798 3,550,374
Total restricted for purpose 5,640,139 4,350,876
Restricted for time 1,010,581 3,121,541
Endowments 10,000,000 -
Total net assets with donor restrictions 16,650,720$ 7,472,417$
Years ended June 30, 2019 2018
Restricted for purpose:
Educational programs 272,000$ 700,675$
Extracurricular activities 405,757 472,000
Other programs 8,944,121 17,865,701
Scholarships 1,051,576 500,531
Total restricted for purpose 10,673,454 19,538,907
Restricted for time 1,980,960 1,649,040
Total net assets released from restrictions 12,654,414$ 21,187,947$
Net assets with donor restrictions

Net Asset Classes: Board-Designated
Required to disclose nature and amounts of board
designations of net assets
New FASB ASC Master Glossary definition
• Net assets without donor restrictions subject to self-
imposed limits by action of the governing board. Board-
designated net assets may be earmarked for future
programs, investment, contingencies, purchase or
construction of fixed assets, or other uses. Some governing
boards may delegate designation decisions to internal
management. Such designations are considered to be
included in board-designated net assets.

Net Asset Classes: Board-Designated Disclosure
Tabular disclosure or on the face of the balance sheet

Net Asset Classes: Board-Designated Disclosure
Note 13 – Net Assets Without Donor Restrictions
• The Board of Directors of XYZ Organization has several
standing board policies that affect the presentation of
board designations on net assets. Bequests without donor
restrictions are designated for long-term investment
(quasi-endowment). The quasi-endowment fund balance
totaled $35,000 at December 31, 20XX. Additionally, the
Board of Directors has established an operating reserve
with the objective of setting funds aside to be drawn upon
in the event of financial distress or an immediate liquidity
need. The operating reserve balance totaled $1,300 at
December 31, 20XX.

Net Asset Classes: Underwater Endowment Funds
“Underwater” endowment funds
• FV is less than either the original gift amount or the
amount required to be maintained by the donor
• Additional Disclosures:
• NFP policy concerning appropriation from underwater
endowment funds
• Aggregate FV and original gift amount (or level required by donor
to be maintained)
• Aggregate amount by which funds are underwater, which are to
be classified as part of net assets with donor restrictions.

Net Asset Classes: Underwater Endowment Disclosure

Expiration of Capital Restrictions
Capital Gifts
• Placed-in-service approach
• In the absence of explicit donor restrictions, gifts of cash or other
assets to be used to acquire or construct a long-lived asset
should be reclassified from net assets with donor restrictions to
net assets without donor restrictions for long-lived assets that
have been placed in service
• Elimination of the option to release the donor-
imposed restriction over the estimated useful life of
the acquired asset

Phase I

Expense Reporting
To help donors, creditors and others in assessing an NFP’s
service efforts, all not-for-profit entities are required to
report information about expenses by nature and function
• Program Services
• Supporting Activities
• Management and general
• Fundraising activities
• Membership development activities

Expense Reporting
Allocate expenses for:
• Activities that represent direct conduct or direct
supervision of program or other supporting activities
• Example: Salaries
• Costs that benefit more than one function
• Example: Information technology, occupancy, salaries, benefits,
professional fees, travel and depreciation

Expense Reporting
Program Services
• Activities that result in goods and services being
distributed to beneficiaries, customers or members that
fulfill the purposes or mission for which the NFP exists
• Expenses need to be allocated amongst the various
program
Supporting Activities
• All activities of an NFP other than program services (M&G,
Fundraising, Development)

Expense Reporting
Management and general includes:
• Oversight
• Business management
• General recordkeeping and payroll
• Budgeting
• Financing, including unallocated interest costs
• Soliciting funds other than contributions and membership dues
• Administering government, foundation and similar customer-sponsored contracts,
including billing and collecting fees and grant and contract financial reporting
• Disseminating information to inform the public of the NFP’s stewardship of contributed
funds
• Making announcements concerning appointments
• Producing and disseminating the annual report
• Employee benefits management and oversight (human resources)
FASB says these are
always M&G

Expense Reporting
Examples
• CEO
• Program, M&G and fundraising
• CFO
• M&G, possibly investment expense
• Grant accounting and reporting
• M&G
• However, a scientific report prepared by a principal investigator
who is responsible for the research activity would be indicative of
DIRECT conduct and/or direct supervision of the grant activity

Expense Reporting
The reporting can be in any of the following
locations:
• On the face of the statement of activities
• As a schedule in the notes to the financial statements
• In a separate financial statement
Supplementary information no longer meets the
requirement

Expense Reporting: Disclosure in Notes or Separate Statement

Expense Reporting: Disclosure on Face of Statement of Activities

Expense Reporting - Disclosure
Summary of significant accounting policies (version #2)
• The financial statements report certain categories of expenses that
are attributable to one or more program or supporting functions of
the Organization. Those expenses include depreciation and
amortization, the president’s office, communications department,
and information technology department. Depreciation is allocated
based on square footage, the president’s office is allocated based on
estimates of time and effort, certain costs of the communications
department are allocated based on estimates of time and effort, and
the information technology department is allocated based on
estimates of time and costs of specific technology utilized.

Summary of significant accounting policies (version #3)
• Functional Expenses – The costs of providing program and other
activities have been summarized on a functional basis in the
statement of activities. Accordingly, certain costs have been allocated
among program services and supporting services benefited. Such
allocations are determined by management on an equitable basis.

Expense
• Grants
• Salaries and benefits
• Education and awareness
• Occupancy
• Professional services
• Printing
• Information technologies
• Travel
• Depreciation
• Other
The Expenses that are Allocated include the Following:
Method of Allocation
• Time and effort
• Time and effort
• Time and effort
• Square footage
• Full time equivalent
• Time and effort
• Square footage
• Time and effort

Allocation of Expenses
Expenses need to be allocated using a reasonable
basis and should be consistently applied:
• Time and Effort Reporting
• Square Footage
• Direct Allocation
Remember must be AUDITABLE

Time and Effort Reporting
Consider which employees will need to be
allocated:
• Allocate between programs
• Allocate between functional areas
Consider if time is consistent throughout the year,
or if there are concentrations:
• Annual meetings, large fundraisers, etc.

Time and Effort Reporting
Frequency and documentation method are going
to vary from organization to organization
• Talk to your friendly CPA
Calendar year organizations need to start ASAP!
• We are 3 months into the reporting window
Fiscal year organizations
• The earlier you develop a system the better

Liquidity and Availability
Requirements:
• Qualitative information on how a NFP manages its liquid
resources available to meet cash needs for general
expenditures within one year of the balance sheet date
• Quantitative information and additional qualitative
information, as needed, that communicates the
availability of financial assets at the balance sheet date to
meet cash needs for general expenditures within one year
of the balance sheet date

Availability of financial assets may be affected by:
• The nature of the assets,
• External limits imposed by donors, laws and contracts
with others, and
• Internal limits (designations) imposed by board decisions

Why change?
• Increase transparency and promote a more thorough and
accurate understanding of the organization’s ability to
fund operations
• Assist stakeholders such potential donors, grantors,
creditors and others in evaluating whether an
organization has sufficient resources to meet financial
obligations as they come due

Qualitative disclosures may include:
• Description of how general expenditures are determined
• Description of how availability of financial resources are
determined
• What they include or exclude
• The organization’s goals for maintaining financial assets
(such as “to be available as general expenditures,
liabilities, and other obligations come due”)
• The organization’s policies for investing excess cash

Qualitative disclosures may include (cont’d):
• Contractual agreements that make certain financial assets
unavailable to fund general expenditures
• The organization’s responsibility to maintain resources to meet donor
restrictions (which may make those resources unavailable for general
expenditures)
• Board designations and any operating or liquidity reserve
• The organization’s policies for spending from donor-restricted and
board-designated (quasi) endowment funds
• Lines of credit and/or board-designated (quasi) endowment funds or
reserves that could be drawn down if needed

Quantitative disclosures will likely be in the form
of a reconciliation, as of the financial statement
date that may report the following:
• Total financial assets
• Less reconciling items
• Equals financial assets available to meet cash needs for
general expenditures within one year
*Only required to report the last bold item

Quantitative disclosures (cont’d)
• Reconciling items may include financial assets that are
not available for general use because of:
• Contractual restrictions,
• Donor-imposed restrictions,
• Board designations, or
• Long-term investments
• Disclose if quantitative info includes or excludes
donor-restricted support

Review sample disclosures from the AICPA
(see separate handout)

Recommendations for implementing Liquidity and
Availability disclosures:
• Determine your stakeholders and the message you want to
convey to them
• Consider this an opportunity to share your strategy for
managing financial resources
• Decide on the best presentation approach for your organization
• Review your procedures around board-designated net assets
• This may be a good time to revisit all existing board designations to
determine if they still make sense
• Document any/all board designations in minutes

Recommendations for implementing Liquidity and
Availability disclosures (cont’d):
• Determine if any new policies will be required, such as an
operating reserve policy
• Decide whether any existing policies need updating or
formalizing
• Evaluate whether any changes to accounting and reporting
systems will be necessary to easily capture the information to
be disclosed
• The disclosures must be “auditable”

In year of adoption:
• NFPs must disclose the nature of any reclassifications or
restatements and their effects, if any, on the changes in the net
asset classes for each period presented
• Include an emphasis-of-matter paragraph in the auditors’ report
• Include a change in accounting principle footnote

Recommendations for implementing ASU 2016-14:
• Work with your CPA firm
• Assign a project owner or committee to become the resident
expert and take the lead on understanding ASU 2016-14
• Read and understand the requirements of the ASU
• Apply what you have learned about the changes in the ASU to
update your organization’s processes and financial reporting
procedures

Recommendations for implementing ASU 2016-14
(cont’d):
• Mark up your financial statements for the changes
• Train your staff and board of directors
• Communicate with your board of directors, donors, creditors and
other interested stakeholders about the changes and prepare for
potential concerns that need to be addressed

Phase II (maybe???)
• Operating measures
• Segment reporting for healthcare entities

Please type in
your questions
Any Questions?

Thank You For Attending!
Jane Houle | Net@Work
Nonprofit Solutions Consulting Manager
Email: jhoule@netatwork.com
Phone: 312-651-0364
800-719-3307
www.netatwork.com
netatwork.com/blog
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Email: dmarks@netatwork.com
Phone: 646-517-6164
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FASB’s New Not-for-Profit Accounting Standard

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