This webinar was hosted by McKonly & Asbury Partner, Janice Snyder, and Principal, Jim Shellenberger, and addressed the requirements of Accounting Standard Update 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities. The presenters reviewed the new requirements under this standard and converted a full set of not-for-profit financial statements from the previous requirements to the new requirements. This was a step-by-step, page-by-page review of not-for-profit financial statements.
5. Introductions
Janice Snyder, CPA
• Partner
• Audit Segment Leader
• Happiness comes in waves!
Jim Shellenberger, CPA
• Principal
• Member of Not-For-Profit Leadership Group
• Currently obsessed with the FIFA World Cup!
6. Agenda
• Requirements of ASU 2016-14
• Converting your Financial Statements
• Actions to Take NOW!
• Questions?
7. Disclaimer
The information contained in this presentation, both that
contained in the slides and that expressed by the presenter, is not
intended to be complete and comprehensive. To obtain a more
detailed understanding of technical literature mentioned, please
consult the full standards and interpretations.
There are also many other topics not being covered due to their
narrow applicability or time constraints.
9. ASU 2016-14
Released August 18, 2016
The most significant changes to Not-For-Profit Financial Reporting
in over 2 decades!
Effective for fiscal years beginning after December 15, 2017!
(Year ends 12/31/2018, 3/31/2019, 6/30/2019 & 9/30/2019)
10. ASU 2016-14
• Affects essentially all not-for-profits, including charities,
foundations, private colleges and universities, nongovernmental
health care providers, religious organizations, trade associations, etc.
• Goal is to meet the evolving needs of the industry, and to provide
better and more consistent information to donors, grantors,
creditors, and other users of financial statements.
11. ASU 2016-14
5 Major Changes
Net Asset
Classification
With and Without
Donor Restrictions
Investment Return
Underwater Endowment Funds –
more disclosures!
Investment return net of all related
external and direct internal expenses
Statement of
Cash Flows
Free choice between direct
or indirect method.
Expenses
Present expenses by both
the natural and
functional classifications.
Liquidity & Availability
of Resources
Qualitative & quantitative information
about the availability of resources to
meet cash needs within one year of
the balance sheet date.
12. Net Asset Classification
• Replaces the existing three classes of net assets with two new
classes of net assets:
• Net Assets With Donor Restrictions
• Net Assets Without Donor Restrictions
Unrestricted Temporarily
Restricted
Permanently
Restricted
Without
Donor
Restrictions
With
Donor
Restrictions
13. Net Asset Classification
• Enhanced disclosure requirements
• Disclosures for board-imposed limits on the use of net assets without donor
restrictions (Quantitative and Qualitative)
• Composition of net assets with donor/grantor restrictions
• Emphasis on how/when net assets can be used (purpose, time, perpetual)
• Highlight how restrictions impact the use of available resources.
14. Net Asset Classification
• Underwater Endowment Funds
• If a donor-restricted endowment fund is determined to be underwater, the
accumulated losses shall be included together with that fund in net assets
with donor restrictions.
• Additional required disclosures
• Board’s policy for spending from endowment funds that are underwater
• Board’s interpretation of relevant law
• Fair value of funds
• Original gift amount
• Level required to be maintained by either the donor or the law
15. Investment Return
• Presented on a net basis, with all external and direct internal
investment management and custodial expenses netted against the
return.
• Show one line “Investment return” or “Income from Investments”
• Eliminates the current requirement to disclose the investment
income components and expenses separately.
• More comparable measure of investment return across all
not-for-profit organizations.
16. Investment Return
• Internal expenses include the direct conduct or direct supervision of
the strategic and tactical activities involved in generating investment
return
• Salaries, benefits, travel and other costs associated with staff responsible for
development and execution of investment strategy, including supervision,
selecting and monitoring external managers.
• Excludes costs not associated with generating investment return, such as
administrative management, contracts, pooled-fund administration.
• Programmatic investments are excluded.
17. Functional Expenses
• Requirement for all not-for-profit organizations to presents
expenses by both the natural and functional classifications
• Natural: Salary, Rent, Office Supplies, etc.
• Functional: Program, Mgt & General, and Fundraising
• Required to be presented in one location:
• Statement of Activities
• Separate Statement (Statement of Functional Expenses)
• Notes to the Financial Statements
18. Functional Expenses - Example
FASB Expects most
organizations (other
than healthcare) to
present on the face.
More than one
category of program
expenses would be
common!
19. Functional Expenses
• Include a description of the method(s) used to allocate costs among program and
support functions.
• When to Allocate Mgt & General:
• Activities that represent direct conduct or direct supervision of program or other
supporting activities to those program. Examples:
• IT – benefits various functions and generally would be allocated.
• CEO – Program, Mgt & General, and Fundraising
• CFO – Mgt & General and Investment Expense
• HR – Generally would assign all to Mgt & General
• Grant Accounting/Reporting – program reports would be Program, but financial reports
would be Mgt & General
20. Functional Expenses
Which Function?
• Salary of an administrative assistant
• Cost of designing, printing and mailing the annual report
• Cost of the audit
• Salary of the development director
• Salary of grant writer who solicits restricted contributions for program activities
• Rent of the office facility
21. Liquidity & Availability of Resources
• Assist readers of the financial statements in determining:
• Available resources
• Management of liquidity
• Liquidity risk
• Objective is to clearly present a not-for-profit organization’s
ability to operate.
22. Liquidity & Availability of Resources
• Quantitative information about the availability of financial assets
as of the date of the statement of financial position.
• Availability may be affected by: Nature of the assets, external limits, and
internal limits.
• Qualitative information about how a not-for-profit organization
manages its available resources to meet cash needs within one year
of the date of the statement of financial position.
23. Statement of Cash Flows
• Free choice between using the direct or indirect method of reporting
operating cash flows.
• If using the direct method, nonprofit organizations are not required
to also present the indirect method reconciliation, as currently
required.
• Certain original proposed changes were deferred to Phase 2
(reclassification among types of activities and improved alignment
with the statement of activities)
35. Reclassifications
Certain reclassifications of amounts previously reported have been made to the
accompanying consolidated financial statements to maintain consistency between
periods presented. The reclassifications had no impact on previously reported net assets.
Recently Adopted Accounting Standard
On August 18, 2016, FASB issued Accounting Standards Update (ASU) 2016-14, Not-for-
Profit Entities (Topic 958) – Presentation of Financial Statements of Not-for-Profit Entities.
The update addresses the complexity and understandability of net asset classification,
deficiencies in information about liquidity and availability of resources, and the lack of
consistency in the type of information provided about expenses and investment return.
We have implemented ASU 2016-14 and have adjusted the presentation in these
consolidated financial statements accordingly. The ASU has been applied retrospectively
to all periods presented which increased net assets without donor restrictions by $42,677
and decreased net asset with donor restrictions by $42,677 resulting from the
reclassifications of underwater endowment funds as required under ASU 2016-14.]
NEW PRESENTATION –
Summary of Significant Accounting Policies
36. Note 3 - Functional Expenses
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, executive salaries and benefits,
administrative and professional fees and supplies expense. Depreciation is
allocated based on a square footage basis, executive salaries and benefits are
allocated based upon the estimates of time and effort, administrative and
professional fees are allocated based on the benefit received and supplies is
allocated based on estimates of specific usage of supplies.
NEW
PRESENTATION
Does your Organization currently have
the detailed methodology in place that
this disclosure will require?
37. NEW
PRESENTATION
Example Net Assets Footnote
Note 10 – Net Assets
Net assets without donor restrictions are comprised of the following:
Must disclose the nature and amount of board-designated net
assets.
38. NEW
PRESENTATION
Example Net Assets Footnote
Note 10 – Net Assets
Net assets with donor restrictions are restricted for the following purposes or periods:
Depending upon materiality, may need to further breakout the
purpose restrictions and time restrictions.
39. NEW
PRESENTATION
Note 4 – Liquidity and Availability
Financial assets available for general expenditures, that is, without donor or other
restrictions limiting their use, within one year of the balance sheet dates, comprise the
following:
Cash $ 1,351,000
Accounts Receivable, net 420,000
Total Financial Assets $ 1,771,000
As part of ABC Company’s liquidity management, it has a policy to structure its
financial assets to be available as its general expenditures, liabilities, and
other obligations come due. To help manage unanticipated liquidity needs, ABC
Company has committed lines of credit in the amount of $200,000, which it could draw
upon as further disclosed in Note 7.
Note: Cash = $1,400,000 from
balance sheet less $49,000 of
funds restricted in perpetuity.
41. Actions to Take Now
• Read the ASU
• Identify the members of management that will lead the
implementation
• Ensure all individuals receive training to understand the changes
• Prepare your stakeholders (Board, donors, lenders, etc.)
• Discuss the impact of the changes with your auditors/accountants:
• Change to the timing of the audit?
• Responsibilities and milestones
• Apply provisions of ASU to your last audited statements
42. Effective Dates and Transition
• Effective Date: Fiscal years beginning after 12/15/2017 (i.e.
12/31/2018, 3/31/2019 and 6/30/2019)
• Transition:
• In year of adoption, apply all provisions of the ASU
• For any comparative year that is presented, can choose not to present:
• Expenses by nature and function (unless already required to do so)
• Liquidity disclosures
• Disclosure the nature of any reclassifications or restatements in year of
adoption on net asset classes
Within Net Assets With Donor Restrictions – “Funds of Perpetual Duration” replaces the superseded ‘Permanently Restricted”
Determine if changes are needed to your tracking mechanisms to accommodate new terminology and presentation (General Ledger/Trial Balance, Excel spreadsheets, etc.)
Determine the appropriate level of disaggregation for your organization and decide if you wish to present on the face of the statement of financial position or in the notes
Board Designations - Assemble information about the amounts and purposes of board designations; Determine presentation of any board-designated endowment funds; Draft language to include in the liquidity footnote pertaining to self-imposed limitations
Underwater Endowments - Rewrite current endowment note to conform to new net asset categories.
Determine:
Fair value of underwater funds
The original gift amount or level required by donor or law.
Aggregate the amount of the deficiencies of each underwater fund
Investments: Report external and direct internal investment expenses as a component of net investment return.
Changes needed to general ledger account structure?
Exclude these expenses from the functional and nature disclosures and presentation.
Establish procedures to accumulate all investment expenses.
Determine where and how to present all expenses by nature and function in one place. – on face of statement of activities, in a separate schedule or in a footnote.
Develop formal allocation methodologies to be used to allocate expenses
Draft footnote disclosing the methods utilized in the allocation
Determine where and how to present all expenses by nature and function in one place.
Develop formal allocation methodologies to be used to allocate expenses
Draft footnote disclosing the methods utilized in the allocation
Determine which method is most appropriate for your Organization, considering accounting/finance constraints, and users of the financial statements.
Feedback from ASU is that users of the financial statements strongly prefer the direct method.
Identify all financial assets and any limitations on availability for expenditure in the next 12 months.
Determine the format to present the required quantitative disclosures
Gross amounts of financial assets, then adjustments
Net amounts available for expenditure
Determine if presented a classified SOFP could enhance or simplify the quantitative disclosures
Develop a formal policy for managing liquidity needs that will be articulated in the qualitative disclosures.
Draft note disclosure and include:
Conditions under which board-designated net assets may be undesignated
Access of lines of credit or other financing sources
Other information relative to your entity