In Part I of this blog, we discussed Accounting Standards Update No. 2016-14 (ASU 2016-14), which is effective for fiscal years beginning after December 15, 2017, and the five key areas it impacts related to nonprofit financial reporting. These areas include: 

1. Net asset classification,
2. Investment income reporting,
3. Expense presentation,
4. Presentation of cash flows, and
5. Liquidity and availability of resources. 

If you haven’t already, it’s time to begin thinking about how these changes affect your particular organization. Below are some implementation strategies to help you come into compliance. 

Net Asset Classification

ASU 2016-14 requires the presentation and disclosure of net assets in two categories — with donor restrictions and net assets without donor restrictions. This requirement was included with the goal of making not-for-profit financial statements easier to read and understand. Consider taking these steps now:

• Take a look at your general ledger, Excel spreadsheet or other tracking mechanism to accommodate new terminology and presentation for net assets (remember, the 990 still requires the traditional three classifications of net assets).
• Determine the appropriate level of disaggregation of net assets you wish to present among the two classes of net assets, as well as the degree to which you would like to present them in the statement of financial position versus the footnotes. See ASU 2016-14 for presentation and disclosure examples to determine what makes sense for your organization.
• Assess all current temporary and permanent restrictions as to nature, type and time period of restrictions and determine additional details you need to gather to meet disclosure requirements. 

When the value of a permanently restricted endowment has fallen below the original gift or the amount required to be maintained by the donor or by law, it is considered to be “underwater” and will now be classified as “with donor restrictions.” Take these steps to ease transition to the new presentation: 

• Determine if any individual endowments are underwater, as individual endowments are often commingled.
• Ensure your investment account statements provide enough information to allow you to obtain the information needed regarding original gift value and fair value for each underwater endowment.
• Create a spending policy relating to underwater endowment earnings, if you do not have one already, and obtain board approval. 

The standard requires disclosures about the amounts and purposes of board designated net assets.  Review your current policies and supporting documentation for self-imposed limitations and consider the following: 

• If an overall written policy does not exist for board designated net assets, create one and obtain board approval.
• Take a look at your current board designated amounts and ensure the purpose is clearly determined.
• If there are board designated net assets no longer considered necessary, consider approaching the board to formally release such designations. 

Not-for-profits will be required to use the “placed-in-service” approach for gifts restricted for the acquisition or construction of long-lived assets. If this applies to your organization: 

• Identify any current temporary restrictions implied for long-lived net assets.
• Ensure there are no specific donor restrictions other than placing the asset in service.
• If an “over time” approach was previously used, determine the amount to reclassify to net assets without donor restrictions, according to the new guidance. The full gift amount is reclassified from net assets “with donor restrictions” to net assets “without donor restrictions” when the acquired or constructed asset is placed in service. 

Investment Income Reporting

Under ASU 2016-14, organizations must report investment return net of external and direct internal investment expenses. First, examine the tracking and reporting of your current investment expenses, then: 

• Determine if your organization has any direct internal investment expenses, which can be thought of as a dedicated internal investment manager.
• Ascertain if there is an opportunity to simplify how investment expenses are tracked and/or recorded in the general ledger. As under current GAAP, investment expenses and the components of investment return are required to be disclosed. ASU 2016-14 removes this requirement. 

Expense Presentation

All not-for-profit organizations must report their expenses by nature and function to comply with the new standard. Previously, this was only required for voluntary health and welfare organizations. If you have not reported expenses in this manner before, you may want to take a look at your expenses to: 

• Determine if you can generate reports from your general ledger by function and use this information to determine your major classes of program and supporting activities. If information is unavailable, determine what changes are needed to the general ledger system, such as coding expenses directly to program or support.
• Determine which expenses must be allocated among program and supporting activities, and determine the appropriate methods of allocation. Document a written policy for each allocation and obtain board approval.
• Decide how you will report the functional expenses in your financial statements, such as within the statement of activities, in a separate statement or in the footnotes. 

Liquidity and Availability of Resources

ASU 2016-14 requires new disclosures of qualitative and quantitative information about an entity’s liquidity and availability of resources. This disclosure is meant to give financial statement users a better understanding of how an organization manages its risks. However, the more complex you organization is, the more onerous it may be to put together the necessary disclosure information. Consider these preliminary steps: 

• Determine what your organization considers “general expenditures,” as there is no clear definition offered in ASU 2016-14.
• Take a look at your current policies that impact liquidity and the availability of resources. If a clear policy doesn’t exist, then develop one and have your board approve.
• Perform a preliminary calculation to determine the amount of “financial assets available for general expenditures in one year.”
• Begin drafting the new disclosure describing how the entity manages its liquid assets and liquidity needs, including conditions under which board designated net assets may be undesignated, access to lines of credit or other financing sources, and other information useful in understanding the entity’s liquidity.
• Determine what format your entity wants to use to present this information. The ASU provides several examples. 

In the year the new guidance is first applied, all not-for-profit organizations must apply a retrospective approach, meaning that the changes will need to be implemented for each period presented in the financial statements, with some exceptions. Collaborate now with your accounting team to be ready. 

View the full ASU

 
Please contact a member of your service team, or contact 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.