Accounting Standards Update (ASU) No. 2016-14 is effective for not-for-profit organizations with fiscal years beginning after December 15, 2017, which means for calendar year-ends 2018 and fiscal year-ends 2019. If you haven’t already, now is the time to develop and put into place the following policies to aid in meeting the requirements of the new standard.
In other words, document how your organization manages its liquid available resources, such as a line of credit and investments without donor restrictions, as well as its liquidity risk, such as seasonable variations of cash flows.
Define your organization’s general expenditures and calculate what financial assets are available to cover those expenditures within one year. In addition, you may want to focus your attention on the organization’s measures currently in place to manage an emergency cash-flow need.
Determine which expenditures are included in management and general expenses. The Financial Accounting Standards Board (FASB) has provided additional guidance to note that the following should always be included in management and general:
Allocate your expenses between programs and supporting services. Be sure to include the methods used, such as by time study performed, square footage basis or benefit received.
The FASB has added examples that improve guidance surrounding payroll allocations. The CEO and information technology staff would generally be allocated among program and supporting services. The CFO and accounting staff would generally be allocated to management and general and investing expenses. Human resources would generally all be assigned to management and general.
Document the nature of board-designated net assets and, in particular, include the conditions under which these funds would be available to meet general expenditure needs. Also this policy should discuss whether the board delegates any designation decisions to internal management.
Document your organization’s interpretation of its ability to spend from underwater endowment funds or funds that have dipped below the original gift, and the policy for appropriating these underwater funds.
>> Read more on this topic: “How ASU 2016-14 Changes Underwater Endowment Reporting”
Define expenses to be classified as investment expenses to be netted against investment return in your financial statements. These can be external and internal expenses. Direct internal investment expense would include salaries of those who are directly involved with the conduct or supervision of the strategic and tactical activities involved in generating investment return. Only net those expenses associated with generating investment return.
Many not-for-profits will see the impact of ASU 2016-14 sooner rather than later. Be prepared by working with your advisory team to create and implement these policies.
Read more on this topic:
“ASU 2016-14 — Part I: Five Areas of Not-for-Profit Financial Reporting That Will Be Impacted”
“ASU 2016-14 — Part II: Implementation Strategies to Help Not-for-Profits Prepare”
Please contact a member of your service team, or contact Tina Dzik at tdzik@cohencpa.com or Marie Brilmyer at mbrilmyer@cohencpa.com for further discussion.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.