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FASB Issues New Guidance to Improve Financial Reporting for Not-for-Profit Organizations.

MAIN PROVISIONS OF THE UPDATE

Net Asset Classifications

On the Statement of Financial Position, the existing three-classification net asset reporting is replaced with two classes of net assets at the end of the period. NFPs will now have to report net assets with donor restrictions and net assets without donor restrictions, as well as presenting total net assets.

On the Statement of Activities, the amount of change in each of the two classes of net assets will be presented, replacing the currently required three-classes of net assets; in addition, the NFP would continue to report the current change in total net assets of the period.

The existing classifications, unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets will be removed from the FASB Accounting Standards Codification Master Glossary once the amendments are implemented. The Board indicates that the distinction between permanent restrictions and temporary restrictions "has become blurred by changes in Statement laws that diminished its relevance, and rendered that distinction less useful on the face of financial statements" (ASU 2016-14, p. 4).
FIGURE 1. Statement of Financial Position Required Under ASU 2016-14

                         Not-for-Profit Entity A
                         Statement of Financial Position
                         June 30, 20X1 and 20X0
                         (in thousands)

Assets:                                            20X1       20X0

  Cash and cash equivalents                       $4,575     $4,960
  Accounts and interest receivable                 2,130      1,670
  Inventories and prepaid expenses                   610      1,000
  Contributions receivable                         3,025      2,700
  Short-term investments                           1,400      1,000
  Assets restricted to investment
  in land, buildings, and equipment                5,210      4,560
  Land, buildings, and equipment                  61,700     63,590
  Long-term investments                          218,070    203,500
 Total assets                                   $296,720   $282,980
Liabilities and net assets:
  Accounts payable                                $2,570     $1,050
  Refundable advance                                            650
  Grants payable                                     875      1,300
  Notes payable                                               1,140
  Annuity trust obligations                        1,685      1,700
  Long-term debt                                   5,500      6,500
Total Liabilities                                 10,630     12,340
Net assets:
  Without donor restrictions                      92,600     84,570
  With donor restrictions                        193,490    186,070
    Total net assets                             286,090    270,640
 Total liabilities and net assets               $296,720   $282,980

Source: ASC 958-205-55-9, p. 92. The FASB Accounting Standards
Codification[R] material is copyrighted by the Financial Accounting
Foundation, 401 Merritt 7, Norwalk, CT 06856, and is used with
permission.


The two classes of net asset reporting will reduce complexity, increase understandability, and bring greater comparability of financial statements that can provide donors, grantors, creditors, and other stakeholders with information useful in identifying and assessing key trends. Later in the article, we shall address some additional reporting components of the amended net asset classification model, as well as financial reporting illustrations. Figure 1 is an example of what the Statement of Financial Position looks like with the amendments.

In addition to the amended net asset section, this model presents assets and liabilities sequenced based on their relative liquidity. The Update does require that the statement of financial position, as well as the statements of activities and cash flows, report comparative financial information. As a result, in Figure 1, the difference in the total net assets between 20X0 and 20X1 is $15,450, which is the increase in net assets that is determined on the Statement of Activities (Figure 2).

Statement of Activities

Three formats of statement of activities are presented in the Update. In each of the formats allowed, revenues and gains are reported first, then expenses, then losses. Reclassification of net assets must be reported separately.
FIGURE 2. Statement of Activities (Single-Column Format) Under ASU 2016
14

                   Not-for-Profit Entity A
                   Statement of Activities
                   Year Ended June 30, 20X1
                   (in thousands)

Changes in net assets without donor restrictions:
Revenues and gains:
  Contributions                                                 $8,640
  Fees                                                           5,200
  Investment return, net                                         6,650
  Gain on sale of equipment                                        200
  Other                                                            150
    Total revenues and gains without donor restrictions         20,840
Net assets released from restrictions
  Satisfaction of program restrictions                           8,990
  Satisfaction of equipment acquisition restrictions             1,500
  Expiration of time restrictions                                1,250
  Appropriation from donor endowment and subsequent
  satisfaction of any
  related donor restrictions                                     7,500
  Total net assets released from restrictions                   19,240
    Total revenues, gains, and other support without
    donor restrictions                                          40,080
Expenses and losses:
  Salaries and benefits                                         15,115
  Grants to other organizations                                  4,750
  Supplies and travel                                            3,155
  Services and professional fees                                 2,840
  Office and occupancy                                           2,528
  Depreciation                                                   3,200
  Interest                                                         382
    Total expenses                                              31,970
  Fire loss on building                                             80
    Total expenses and losses                                   32,050
      Increase in net assets without donor restrictions          8,030
Changes in net assets with donor restrictions:
   Contributions                                                 8,390
   Investment return, net                                       18,300
   Actuarial loss on annuity trust obligations                     (30)
   Net assets released from restrictions                       (19,240)
      Increase in net assets with donor restrictions             7,420
Increase in total net assets                                    15,450
Net assets at beginning of year                                270,640
Net assets at end of year                                     $286,090

Source: ASC 958-205-55-13, p. 47. The FASB Accounting Standards
Codification" material is copyrighted by the Financial Accounting
Foundation, 401 Merritt 7, Norwalk, CT 06856, and is used with
permission.


The first format is provided in Figure 2, which is a single-column format. In this format, comparative year data may be provided. This model reports those activities without donor restrictions first, reporting those activities with donor restrictions separately. The net increase or decrease in net assets is reported as a subtotal ($15,540 in Figure 2), as well as beginning and ending net assets.

Figure 3 presents the same information as Figure 2, but in a multicolumn format; a column is provided for each class of net assets. A total column is optional, but the change in total net assets is presented in accordance with ASC 958-210-45-1. Each figure presents aggregated information regarding contributions and investment returns of the entity as a whole.

The third format option can be found in Figure 4. This figure is presented in a columnar format, but the Update also allows a single-column approach, which requires a two-statement presentation.

According to the Update, the two-statement format may be preferred by membership organizations and NFPs where management believes that "certain transactions and events, including receipts of donor-restricted revenues and gains from contributions and investment return[s], as incidental or insignificant to their daily operations" (ASC 958-205-55-10, par. c). For ease of presentation, we are illustrating the columnar format (Figure 3), as well as a more condensed alternative approach (Figure 4).
FIGURE 3. Statement of Activities (Multicolumn Format) Under ASU 2016-14

                                     Not-for-Profit Entity A
                                     Statement of Activities
                                     Year Ended June 30, 20X1
                                     (in thousands)

                                       Without Donor        With Donor
                                       Restrictions         Restrictions

Revenues, gains,
and other support:
 Contributions                           $8,640               $8,390
 Fees                                     5,200
 Investment return, net                   6,650               18,300
 Gain on sale of equipment                  200
 Other                                      150
 Net assets released from
 restrictions
  Satisfaction of program
  restrictions                            8,990               (8,990)
  Satisfaction of equipment
  acquisition restrictions                1,500               (1,500)
  Expiration of time restrictions         1,250               (1,250)
  Appropriation from
  donor endowment and
  subsequent satisfaction of any          7,500               (7,500)
  restrictions
  Total net assets released
  from restrictions                      19,240              (19,240)
    Total revenues, gains,
    and other support                    40,080                7,450
Expenses and losses:
  Program A                              13,296
  Program B                               8,649
  Program C                               5,837
  Management and general                  2,038
  Fundraising                             2,150
    Total expenses                       31,970
  Fire loss on building                      80
  Actuarial loss on annuity
  trust obligation                                                30
    Total expenses and losses            32,050                   30
  Change in net assets                    8,030                7,420
  Net assets at beginning of year        84,570              186,070
  Net assets at end of year             $92,600             $193,490

                                    Not-for-Profit Entity A
                                    Statement of Activities
                                    Year Ended June 30, 20X1
                                    (in thousands)

                                             Total
Revenues, gains,
and other support:
 Contributions                               $17,030
 Fees                                          5,200
 Investment return, net                       24,950
 Gain on sale of equipment                       200
 Other                                           150
 Net assets released from
 restrictions
  Satisfaction of program
  restrictions                                  -
  Satisfaction of equipment
  acquisition restrictions                      -
  Expiration of time restrictions               -
  Appropriation from
  donor endowment and
  subsequent satisfaction of any                -
  restrictions
  Total net assets released
  from restrictions                             -
    Total revenues, gains,
    and other support                         47,530
Expenses and losses:
  Program A                                   13,296
  Program B                                    8,649
  Program C                                    5,837
  Management and general                       2,038
  Fundraising                                  2,150
    Total expenses                            31,970
  Fire loss on building                           80
  Actuarial loss on annuity
  trust obligation                                30
    Total expenses and losses                 32,080
  Change in net assets                        15,450
  Net assets at beginning of year            270,640
  Net assets at end of year                 $286,090

Source: ASC 958-205-55-13, p. 49. The FASB Accounting Standards
Codification[R] material is copyrighted by the Financial Accounting
Foundation, 401 Merritt 7, Norwalk, CT 06856, and is used with
permission.

FIGURE 4. Statement of Activities (Alternative Format) Under ASU 2016-14

                   Not-for-Profit Entity A
                   Statement of Activities
                   Year Ended June 30, 20X1
                   (in thousands)

                                      Without Donor       With Donor
                                      Restrictions        Restrictions

Revenues, gains, and
other support:
   Revenues and gains
   without donor
   restrictions                         $20,840
   Revenues and gains
   with donor restrictions:
     Contributions                                           8,390
     Investment return, net                                 18,300
   Net assets released from
   restrictions (Note D)                 19,240            (19,240)
     Total revenues, gains,
     and other support                   40,080              7,450
Expenses and losses:
   Expenses and losses                   32,050
   Actuarial loss on
   annuity trust obligation                                     30
     Total expenses and losses           32,050                 30
Change in net assets                      8,030              7,420
Net assets at beginning of year          84,570            186,070
Net assets at end of year               $92,600           $193,490

                   Not-for-Profit Entity A
                   Statement of Activities
                   Year Ended June 30, 20X1
                   (in thousands)

                                             Total

Revenues, gains, and
other support:
   Revenues and gains
   without donor
   restrictions                             $20,840
   Revenues and gains
   with donor restrictions:
     Contributions                            8,390
     Investment return, net                  18,300
   Net assets released from
   restrictions (Note D)                       -
     Total revenues, gains,
     and other support                       47,530
Expenses and losses:
   Expenses and losses                       32,050
   Actuarial loss on
   annuity trust obligation                      30
     Total expenses and losses               32,080
Change in net assets                         15,450
Net assets at beginning of year             270,640
Net assets at end of year                  $286,090

Source: ASC 958-205-55-17, p. 55. The FASB Accounting Standards
Codification[R] material is copyrighted by the Financial Accounting
Foundation, 401 Merritt 7, Norwalk, CT 06856, and is used with
permission.


Statement of Cash Flows

The Update continues to require the net amount for operating cash flows (either net cash provided or net cash used for operating activities) using either the direct or indirect method of reporting. However, the Update no longer requires presentation or disclosure of the indirect method for reporting operating activities if the direct method is used.

Figure 5 presents only the direct method; no reconciliation from change in net assets for the operating activities section is presented. Please note that the authors consolidated some of the activities in the Update for brevity.

Functional Classification of Expenses

The Update made a significant change to NFP reporting by now requiring all not-for-profit entities to report an analysis of expenses by their nature and function. The prior standard required only that voluntary health and welfare entities report the natural classification of expenses on a statement of functional expenses. However, "all NFPs shall report information about all expenses in one location on the face of the statement of activities, as a schedule in the notes to the financial statements, or in a separate financial statement, as discussed in paragraph 958-205-45-6."

The Update allows NFPs flexibility in how they report the analysis of the expenses by their nature and function. The relationship between functional classification and natural classification for all expenses shall be presented in an analysis that disaggregates functional expense classifications, such as major classes of program services and supporting activities, by the natural expense classifications.
FIGURE 5. Statement of Cash Flows (Direct Method)

                           Not-for-Profit Entity A
                           Statement of Cash Flows
                           Year Ended June 30, 20X1
                           (in thousands)

Cash flows from operating activities:
  Cash received from service recipients                       $5,020
  Cash received from contributions                             8,030
  Cash collected on promises to give                           2,615
  Interest and dividends received                              8,570
  Cash paid to employees and retirees                        (13,400)
  Cash paid to suppliers                                      (5,658)
  Interest paid                                                 (382)
  Grants paid                                                 (5,025)
     Net cash used by operating activities                      (230)
Cash flows from investing activities:
  Purchase of equipment                                       (1,500)
  Proceeds on the sale of equipment                              200
  Insurance proceeds from fire loss on building                  250
  Proceeds from sale of investments                           76,100
  Purchase of investments                                    (74,900)
    Net cash provided by investing activities                    150
Cash flows from financing activities:
  Proceeds from contributions restricted for:
    Investment in perpetual endowment                            270
    Investment in land, buildings, and equipment               1,410
                                                               1,680
Other financing activities:
    Payments on notes payable                                 (1,985)
                                                              (1,985)
Net cash used by financing activities                           (305)
Net decrease in cash and cash equivalents                       (385)
Cash and cash equivalents at beginning of year                 4,960
Cash and cash equivalents at end of year                      $4,575
   Supplemental data for noncash
   investing and financing activities:
   Gift of equipment                                            $140
   Gift of paid-up life insurance, cash surrender value           80

Source: Adapted from ASC 958-205-55-19. The FASB Accounting Standards
Codification[R] material is copyrighted by the Financial Accounting
Foundation, 401 Merritt 7, Norwalk, CT 06856, and is used with
permission.


Note F of 958-720-45-15 provides an example of how to report expenses by nature and by function (this is located under Notes to the Financial Statements at ASC 958-205-55-21). This is provided in Figure 6.

According to Note F of the Update, the financial statement will report certain categories of expenses that are attributable to more than one program or supporting function. Therefore, these expenses require allocation on a reasonable basis that is consistently applied. The expenses that are allocated include office and occupancy, depreciation, and interest, which are allocated on a square-footage basis, as well as salaries and benefits, which are allocated on the basis of estimates of time and effort (ASC 958-720-45-15).
FIGURE 6. Functional Expenses Presentation Under ASU 1016-14

                                               Program Activities
                            A             B           C         Program
                                                                Subtotal

Salaries and benefits       $7,400       $3,900      $1,725    $13,025
Grants to other
organizations                2,075          750       1,925      4,750
Supplies and travel            890        1,013         499      2,402
Services and
professional
fees                           160        1,490         600      2,250
Office and occupancy         1,160          600         450      2,210
Depreciation                 1,440          800         570      2,810
Interest                       171           96          68        335
Total expenses             $13,296       $8,649      $5,837    $27,782

                                      Supporting Activities
                       Management   Fund-Raising   Supporting     Total
                       and General                 Subtotal     Expenses

Salaries and benefits   $1,130         $960         $2,090       $15,115
Grants to other
organizations                                                      4,750
Supplies and travel        213          540            753         3,155
Services and
professional
fees                       200          390            590         2,840
Office and occupancy       218          100            318         2,528
Depreciation               250          140            390         3,200
Interest                    27           20             47           382
Total expenses          $2,038       $2,150         $4,188       $31,970

Source: ASC 958-720-45-15 p. 66. The FASB Accounting Standards
Codification ([R]) material is copyrighted by the Financial Accounting
Foundation, 401 Merritt 7, Norwalk, CT 06856, and is used with
permission.


OTHER PROVISIONS IN THE UPDATE

Reporting Endowment Funds

According to ASC 958-205-45-13, endowment funds are established by either a donor or by a governing board and can be with donor restrictions or without restrictions. Funds with donor restrictions are referred to as donor-restricted endowment funds, which result from a gift with a stipulation that the resources be invested either for a long, specified period of time, or held in perpetuity.

Any endowment funds without donor restrictions are referred to as board-designated endowment funds. Such funds are created when a governing board designates for earmarks a portion of its net assets without donor restrictions to be invested, "generally for a long but possibly unspecified period of time" (ASC 958-205-45-13).

On the statement of financial position, as indicated earlier, endowment funds are reported in the net asset section within the following two classes of net assets on the basis of the existence or absence of donor-imposed restrictions:
Net assets with donor restrictions. A donor-restricted endowment would
be classified as net assets with donor restrictions.
Net assets without donor restrictions. A board-designated endowment
fund, which generally results from an internal designation of net
assets without donor restrictions, would generally be classified as net
assets without donor restrictions (ASC 958-205-45-13A).


According to ASC 958-205-45-13B, when classifying a donor-restricted endowment fund, consideration must be given to both the donor's explicit stipulations and the applicable laws that extend donor restrictions. Investment return is generally considered free of donor restrictions unless it is limited by a donor-imposed restriction or by a law.

Conversely, for an endowment fund that is created by a governing board (board-designated endowment fund), assuming no other purpose-type restrictions exist on the use of those types of funds, the original fund and all investment returns are free of donor restrictions, and are reported as net assets without donor restrictions.

Underwater Endowment Funds

In the Amendments to the Master Glossary, the Update defines an underwater endowment fund as "a donor-restricted endowment fund for which the fair value of the fund at the reporting date is less than either the original gift amount or the amount required to be maintained by the donor or by law that extends donor restrictions" (ASC 958-10-65-1).

The Update no longer allows underwater endowments to be offset against unrestricted net assets, but now requires those amounts be reported within net assets with donor restrictions. NFPs will be required to disclose their policy for spending from underwater endowments, as well as reporting the aggregate original gift amounts and the fair value of those funds. ASC 958-205-50-1B requires, at a minimum, that an NFP disclose the following regarding underwater endowments:

a. A description of the governing board's interpretation of the law or laws that underlie the NFPs net asset classification of donor-restricted endowment funds, including its interpretation of the ability to spend from underwater endowment funds.

b. A description of the NFPs policy or policies for the appropriation of endowment assets for expenditure (its endowment spending policy or policies), including its policy, and any new actions taken during the period, concerning appropriation from underwater endowment funds.

Disclosures on Liquidity and Availability

The Update requires in ASC 958-210-50-1 that a NFP disclose in the notes to the financial statements relevant information about the liquidity or maturity of assets and liabilities, including restrictions and self-imposed limits on the use of particular items, in addition to information provided on the statement of financial position. Specifically, an NFP must disclose the following, according to ASC 958-210-50-1A:

a. Qualitative information in the notes to the financial statement that is useful in assessing an entity's liquidity and communicates how an NFP manages its liquid resources available to meet cash needs for general expenditures within one year of the date of the statement of financial position.

b. Quantitative information either on the face of the statement of financial position or in the notes, and additional qualitative information in the notes as necessary, that communicate the availability of an NFPs financial assets at the date of the statement of financial position to meet cash needs for general expenditures within one year of the date of the statement of financial position (see paragraph 958-210-45-7(c)).

Availability of a financial asset may be affected by:

1. Its nature.

2. External limits imposed by donors, laws, and contracts with others.

3. Internal limits imposed by governing board decisions.

Figure 7 presents a sample of a liquidity disclosure.
FIGURE 7. Liquidity Availability Disclosure Presentation Under ASU
1016-14

Financial Assets, at year-end                              $234,410
Less those unavailable for general
expenditures within one year, due to:
 Contractual or donor-imposed restrictions:
   Restricted by donor with time or purpose
   restrictions                                             (11,940)
   Subject to appropriation and satisfaction
   of donor restrictions                                   (174,700)
   Investments held in annuity trust                         (4,500)
 Board designations:
   Quasi-endowment fund, primarily for
   long-term investing                                      (36,600)
   Amounts set aside for liquidity reserve                   (1,300)
     Financial assets available to meet cash
     needs for general
     expenditures within one year                            $5,370

Source: ASC 958-205-55-21, Note G, p. 67. The FASB Accounting Standards
Codification[R] material is copyrighted by the Financial Accounting
Foundation, 401 Merritt 7, Norwalk, CT 06856, and is used with
permission.


One of the reporting challenges of NFPs is the ability for financial statement readers to determine the financial asset availability (liquidity availability) from the face of the statement of financial position, given that NFPs have many donor-imposed restrictions, as well as board-designations.

Figure 7 highlights how organizations need to disclose, at minimum, such cash availability in the notes to the financial statements. The liquidity disclosures are some of the more significant reporting changes required in this Update.

OBJECTIVES REACHED IN THE UPDATE

The Update aimed to address four areas of the current financial reporting model of NFPs, including:

* The complexities in the formal reporting of net assets

* The inconsistencies in the reporting of intermediate measures of operations on the statement of activities necessary in assessing an entity's financial performance

* The problems in information reported about operating expenses by both function and nature

* Misunderstandings about how to improve the utility of reporting operating cash flows

It is the authors' views that this Update is a very productive effort by the FASB to address these issues in improving the financial reporting for not-for-profit entities. The new format of the financial statements will be initially costly to NFPs to implement, but this Update does satisfy its objectives of providing users greater clarity and transparency into the operations and financial position of NFP entities.

TRANSITION AND EFFECTIVE DATE OF UPDATE

Accounting Standards Update (ASU) No. 2016-14, Not-for-Profit Entities (Topic 958) Presentation of Financial Statements for Not-for-Profit Entities, is effective for annual financial statements issued for fiscal years beginning after December 15, 2017, and for interim periods within fiscal years beginning after December 15, 2018. The Update permits early adoption. The Update provides guidance for the years of transition when the new standard is adopted, including specific disclosures that must be made at ASC 958-10-65-1.

FASB ISSUES PROPOSED GUIDANCE FOR CONTRIBUTIONS RECEIVED AND CONTRIBUTIONS MADE

As of this writing, on August 3, 2017, the FASB issued an Exposure Draft, Proposed Update to Topic 958, to clarify and improve the scope and guidance for contributions received and contributions made.

According to the Exposure Draft, the amendments "would assist entities in (1) evaluating where transactions should be accounted for as contributions (non-reciprocal transactions) within the scope of Topic 958, Not-for-Profit Entities, or as exchange (reciprocal) transactions subject to other guidance, and (2) distinguishing between conditional contributions and unconditional contributions."

Given the diversity of reporting practices around contributions, this proposed Update is necessary to add clarity to and strengthen not-for-profit financial reporting.

References

Accounting Standards Update (ASU) No. 2016-14, Not-for-Profit Entities (Topic 958) Presentation of Financial Statements for Not-for-Profit Entities. Norwalk, CT: Financial Accounting Standards Board.

Proposed Accounting Standards Update, FASB Exposure Draft, Not-for-Profit Entities (Topic 958) and Health Care Entities (Topic 954). April 22, 2015. Norwalk, CT: Financial Accounting Standards Board.

Proposed Accounting Standards Update, FASB Exposure Draft, Not-for-Profit Entities (Topic 958), Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. August 3, 2017. Norwalk, CT: Financial Accounting Standards Board.

Adrian P. Fitzsimons, PhD, CPA, is a Professor in the Department of Accountancy at The Peter J. Tobin College of Business, St. John's University, New York, fitz.sima@stjohns.edu

Irene N. McCarthy, PhD, CPA, is a Professor in the Department of Accountancy at The Peter J. Tobin College of Business, St. John's University, New York, mccarthi@stjohns.edu

Benjamin R. Silliman, EdD, CPA, is a Professor in the Department of Accountancy at The Peter J. Tobin College of Business, St. John's University, New York, sillimab@stjohns.edu
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Author:Fitzsimons, Adrian P.; McCarthy, Irene N.; Silliman, Benjamin R.
Publication:Review of Business
Geographic Code:1USA
Date:Jan 1, 2018
Words:3927
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