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.
1. Liquidity Management
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.
2. Financial Assets Available to Cover General Expenditures Within One Year
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.
3. Management and General Expenses
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:
- Business management
- General recordkeeping and related payroll
- Budgeting and financing
- Soliciting funds for anything other than contributions and membership dues
- Administration of government, foundation and similar contracts, including billing, collecting fees and related financial reporting
- Providing public information of the organization’s use of contributed funds
- Making announcements regarding appointments
- Producing and disseminating the annual report
- Employee benefits management and oversight, such as human resources
4. Expense Allocations
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.
5. Board Designations on Net Assets
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.
6. Underwater Endowment Funds
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”
7. Investment Expenses Netted Against Investment Return
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 firstname.lastname@example.org or Marie Brilmyer at email@example.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.