Posts tagged with "ASU 2016-14"

Are you in Compliance with ASU 2016-4? Financial Statement Presentation of Not-for-Profit Entities

Update:

White Paper Available: “Understanding. Preparing. Implementing.  FASB ASU 2016-14 reporting requirements for Not-for-Profit Organizations

Overview

In November 2011, the Financial Accounting Standards Board (FASB) added a project to its agenda focusing on the financial reporting of not-for-profit (NFP) entities. The project has resulted in the issuance of Accounting Standards Update (ASU) No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities. The update strives to improve how a NFP organization classifies its net assets and provides information in its financial statements and notes about its financial performance, cash flows and liquidity.  We have summarized the full 270-page standard into this brief guide which outlines the primary changes to the financial statements of not-for-profit organizations.

Net Asset Classes

  • Replaces the current three net asset classes with the following two:
    • Net assets with donor restrictions
    • Net assets without donor restrictions
  • Removes hardline distinction between temporary and permanent restrictions
  • Enhances disclosure requirements:
    • Amounts and purposes of board-designated net assets
    • How restrictions affect the use of resources

In order to implement the new changes, you will need to modify your financial report formats and chart of accounts to insure your internal financial reports are modified for the new financial reporting requirements.  You will need to determine appropriate level of disaggregation of the net assets for Statement of Financial Position, Statement of Activities, and footnote disclosures.

Underwater Endowments

  • Presents deficits relative to original gift amounts of donor-restricted within the donor-imposed restrictions class of net assets
  • Enhances disclosure requirements:
    • Governing board’s policy related to appropriations from such funds
    • Any action taken during the period related to such funds
    • Original gift amount or level otherwise required to be maintained by the donor or law
    • Amount of the underwater endowments in the aggregate

In order to implement the changes, you will need to recast your note to conform to the new two net asset categories.  Remember that the underwater portion of endowments is now presented entirely in net assets with donor restrictions.  The investment return is now presented net of external and direct internal investment expenses, and does not require a separate break-out of the components of investment return.

Expiration of Restrictions – Long-lived Assets

  • Requires use of the “placed-in-service approach” for determination of when restrictions expire
  • No longer allows the recognition of the expiration of restrictions over the asset’s useful life

Statement of Cash Flows

  • May continue to elect either the direct or indirect method
  • When using the direct method, no longer requires the reconciliation of changes in net assets to cash flows from operating activities

Liquidity and Availability of Resources

  • Requires disclosure of qualitative information about how liquid resources are managed
  • Requires disclosure of quantitative information related to availability of financial assets to meet cash needs for general expenditures within one year, including impact of the following on financial assets:
    • Nature of the financial assets
    • External limits by donors, grantors, laws and contracts
    • Internal limits by the governing board

In order to implement the changes, you will need identify all financial assets, and any limitations on availability for expenditure in the next 12 months.   You will need to determine the format to present the required quantitative disclosure.   You can either display amounts of financial assets then adjustments to arrive at an available for expenditures amount or you can display only the net amounts available for expenditure.  You could determine whether presenting a classified statement of financial position could enhance or simplify the quantitative disclosure requirements considering other effects elsewhere in the financial statements and related notes.  You might want to develop a formal policy for managing the organization’s liquidity needs which might be disclosed in the qualitative portion of the note disclosure.

Investment Return

  • Requires external and direct internal investment expenses to be net against investment returns
  • Removes requirement to disclose amount of investment expenses net against investment returns
  • Clarifies what activities constitute direct internal investing activities:
    • Salaries and related expenses of staff responsible for the development and execution of investment strategy
    • Allocable costs associated with internal investment management and supervising, selecting, and monitoring of external investment management firms
  • Permits separate, appropriately labeled line items on the statement of activities for net investment return managed differently or derived from different sources
  • Eliminates the requirement to present investment return components for changes in endowment net assets

Reporting of Expenses

  • Requires all NFPs to report expenses by nature
  • Retains requirement to report expenses by function
  • Requires expense analysis by nature and function to be presented in one location, in either:
    • The statement of activities
    • A separate statement of expenses (similar to the statement of functional expenses)
    • A schedule in the notes
  • Enhances disclosures related to methods used to allocate costs among functions
  • Updates descriptions of management and general activities

In order to implement the changes, you will need to determine where and how to present all expenses by nature and function in one place which might a in the statement of functional expense, statement of activities, or a note to the financial statements.  You will need to evaluate whether your current accounting system will support preparation of this required information.  You will need to develop formal allocation methodologies to be used to allocate expenses among program and supporting services categories.  You will need to draft note disclosure of the methods utilized in the expense allocation process.  It might be time to put together a formal cost allocation plan.

Effective Date and Transition

  • Annual financial statements issued for fiscal years beginning after Dec. 15, 2017
  • Early application is permitted
  • Requires adoption on retrospective basis for all years presented, except for:
    • Analysis of expenses by nature and function
    • Disclosures related to liquidity and availability of resources

Don’t forget to take advantage of our free resource.   “Understanding. Preparing. Implementing.  FASB ASU 2016-14 reporting requirements for Not-for-Profit Organizations

Part 3 FASB ASU 2016-14 Reporting Requirements White Paper

Part 3 FASB ASU 2016-14 Reporting Requirements White Paper

We’re pleased to make available the third and final segment of the three-part white paper series on FASB ASU 2016-14:

Click here to access FASB ASU 2016-14 Reporting Requirements for Not-For-Profit Organizations White Paper Series Part 3 of 3.

This 8-page document is a project plan to help you and your organization focus on task oriented items detailed in all three phases: understanding, preparing, and implementing.

Haven’t accessed Part 1 or Part 2? No problem! Use the links below.

Part 1 – Understanding. Preparing. Implementing. FASB ASU 2016-14 Reporting Requirements White Paper

Part 2 – Understanding. Preparing. Implementing. FASB ASU 2016-14 Reporting Requirements White Paper

Financial Technologies Management works exclusively with nonprofits – providing affordable accounting services, software, and technology.

With the Financial Accounting Standards Board (FASB) issuing a new accounting standards update specifically for nonprofits (ASU 2016-14) to improve the current net asset classification requirements and the information presented in financial statements and notes about a nonprofit entity’s liquidity, financial performance, and cash flows, this is considered a big change.

In fact, this is the first major set of changes to nonprofit financial statement presentation standards since 1993.

Part 3 in our 3-Part White Paper Series on Understanding. Preparing. Implementing. FASB ASU 2016-14 Reporting Requirements for Not-For-Profit Organizations is an active project plan to help you and your organization focus on task-oriented items detailed in all 3 phases; understanding, preparing and implementing.

Feel free to edit and alter this to make it work for your unique nonprofit environment. Not every task will apply to your nonprofit, and there will probably be tasks you will need to add. Part 3 is meant to help guide you and your team as you embark on satisfying the new FASB ASU 2016-14 reporting requirements.

If you don’t want to go it alone – the team at FTM is here to help. We’ve been serving nonprofits exclusively since 1999. We work with nonprofit to select and implement leading nonprofit accounting solutions.

We also provide accounting services, including outsourced accounting, for organizations that understand that professional attention to the organization’s financial accounting is a prerequisite for proper stewardship.

FASB White Paper Part 2 Reporting Requirements for Not-for-Profits

FASB White Paper Part 2 Reporting Requirements for Not-for-Profits

As discussed in Part 1, by simplifying the financial statements, and by enhancing disclosures (footnotes), the FASB ASU 2016-14 changes will enable not-for-profit organizations to provide a more accurate and complete financial picture. The distinction between permanent restrictions and temporary restrictions had blurred over time by changes and as a result, had become less useful on the face of financial statements.

By reducing the number of classes of net assets that must be reported on the face of financial statements, especially the statement of activities, it will help reduce complexity, increase understandability, and enable greater use of multi-period comparative financial statements that can provide donors, grantors, creditors, and other stakeholders with information useful in identifying and assessing key trends.

Part 2 of Understanding. Preparing. Implementing. FASB ASU 2016-14 Reporting Requirements for Not-For-Profit Organizations will:

1) Analyze the changes in each financial statement. Helpful Hint: We recommend printing your audit statements to make it easier to compare and take notes.

2) Review typical chart of account changes needed to facilitate the new reporting.

3) Assess the accounting that may be needed in day-to-day and/or year-to-year processes.

4) Review the footnote changes that will be required. While many auditors prepare these for their clients, it’s smart to think them through and own the process.

Download the white paper