Implementing ASU 2016-14 Not-For-Profit Financial Statement New Reporting Standardsmedia.straffordpub.com/products/implementing-asu-2016-14... ·  · 2017-11-21Nov. 28, 2017 Implementing

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Implementing ASU 2016-14 Not-For-Profit

Financial Statement New Reporting Standards

TUESDAY, NOVEMBER 28, 2017, 1:00-2:50 pm Eastern

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Nov. 28, 2017

Implementing ASU 2016-14 Not-For-Profit Financial Statement New Reporting Standards

Robert Dyson, CPA, Quality Control Director

MBAF, New York

[email protected]

George I. Victor, CPA, CGMA, Shareholder

Giambalvo Stalzer & Company, Great River, N.Y.

[email protected]

Notice

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any tax opinions, memoranda, or other tax analyses contained in those materials.

The information contained herein is of a general nature and based on authorities that are

subject to change. Applicability of the information to specific situations should be

determined through consultation with your tax adviser.

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Implementing ASU 2016-14 to Non-

Profit Financial Statements Robert A. Dyson, CPA, MS

Director at MBAF

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In August 2016, FASB issued Accounting Standards Update (ASU) 2016-14, Presentation of Financial Statements of Not-for-Profit Entities, with the stated purpose of improving financial reporting by not-for-profit entities (NFP) by:

– Reducing the number of classes of net assets from three to two,

– Requiring the presentation of expenses in both natural and functional classifications, and

– Eliminating the requirement to prepare a reconciliation in the statement of cash flows when applying the direct method.

ASU 2016-14 also revises the definitions of certain terms, which are presented in the sidebar, “Changes in the Master Glossary,” in the article included in the handouts.

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ASU 2016-14 is effective for fiscal years beginning after December 15, 2017, with early application permitted.

All provisions should be applied in the year of adoption.

Comparative years presented should be applied on a retrospective basis. An NFP has the option of omitting the analysis of expenses by both functional and natural classification and certain disclosures about liquidity and availability of resources for any comparative periods originally presented before the period of adoption.

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To date, the Form 990 and certain related state tax forms have not been revised to reflect the ASU. NFPs may wish to defer early adoption of ASU 2016-14 until the forms’ instructions are revised to reflect the update.

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Current accounting guidance focuses on the existence or absence of donor-imposed restrictions by presenting an NFP’s net assets and revenue in three classes: permanently restricted, temporarily restricted, and unrestricted.

The current guidance does not identify all amounts that are available for general operations.

Resources limited by board designations, grantors, laws, and contracts are not clearly presented, even though they affect an NFP’s liquidity. On the other hand, the statement of financial position does not reflect laws (such as UPMIFA) that permit access to permanently restricted net assets.

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The objective of ASU 2016-14 is to clearly present an NFP’s liquidity and ability to operate. Unrestricted net assets are now called net assets without donor restrictions. Permanently restricted and temporarily restricted net assets are combined into net assets with donor restrictions. An NFP must present total net assets with donor restrictions, total net assets without donor restrictions, and total net assets in the statement of financial position.

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The adoption of ASU 2010-14 is not simply changing the name of “unrestricted net assets” to “net assets without donor restrictions” and adding temporarily restricted net assets to permanently restricted net assets to arrive at “net assets with donor restrictions.” Specific provisions of ASU 2016-14 affect both the balances of the different classes of net assets and those of endowment funds. For example, ASU 2016-14 requires NFPs to classify contributions to acquire long-lived assets as donor-restricted support. When the asset is acquired and placed into service, the contributions are released from restrictions and reclassified to net assets without donor restrictions unless the donor placed a time restriction on the use of the asset. Currently, contributions restricted to the acquisition of long-lived assets are currently recorded as increases in temporarily restricted net assets; the release from restrictions can be either when the asset is acquired and placed in service or over its useful life.

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Changes in net assets as a result of adopting ASU 2016-14 are as follows:

(1) ASU 2016-14 requires an underwater donor-restricted endowment fund to include any accumulated losses with that fund in net assets with donor restrictions.

Without Donor

Restrictions

With Donor Restrictions

Total

Combining net assets into two classes:

Unrestricted $3,700,000 $3,700,000

Temporarily restricted $10,050,000 10,050,000

Permanently restricted 9,000,000 9,000,000

Other adjustments required by ASU 2016-14:

Property reclassified as without donor restrictions

2,000,000 (2,000,000) –

Underwater endowment (1) 500,000 (500,000) –

Total per ASU 2016-14 $6,200,000 $16,550,000 $22,750,000

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Other than the net asset section, ASU 2016-14 does not change the format of the statement of financial position.

Conversion of the Statement of Financial Position under Current Guidance ASU 2016-14, as of

(1) ASU 2016-14 has no effect on these line items.

Assets Current Guidance Adjustments ASU 2016-14

Total assets $34,000,000 N/A(1) $34,000,000

Total liabilities $11,250,000 N/A(1) 11,250,000

Net assets

Unrestricted $3,700,000 (3,700,000)

Without donor restrictions 6,200,000 $6,200,000

Temporarily restricted 10,050,000 (10,050,000)

Permanently restricted 9,000,000 (9,000,000)

With donor restrictions 16,550,000 16,550,000

Total net assets 22,750,000 22,750,000

Total liabilities and net assets $34,000,000 $34,000,000

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ASU 2016-14 changes the format of the statement of activities by aligning current reporting requirements in the statement of activities to the two new classifications of net assets. The statement of activities reports revenues as increases in net assets without donor restrictions unless the use of the assets received is limited by donor-imposed restrictions. Donor-restricted contributions whose restrictions are met in the same reporting period received may be reported as unrestricted support in net assets without donor restrictions provided that an NFP has a similar policy for reporting investment gains and income, reports consistently from period to period, and discloses its accounting policy. Expenses are reported as decreases in net assets without donor restrictions.

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ASU 2016-14 presents three alternate formats for the statement of activities, two of which are illustrated in the attached article.

All three formats separate program activities from supporting activities. Program activities consist of services rendered to beneficiaries that fulfill the NFP’s mission. Supporting activities are other than program services. Generally, supporting activities include management and general activities, fundraising activities, and membership development activities.

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Presentation of the Statement of Activities for the Year Ended June 30, 2018

Total revenues and gains without donor restrictions $17,110,000

Net assets released from restrictions

Satisfaction of program restrictions $3,000,000

Satisfaction of equipment acquisition restrictions 600,000

Expiration of time restrictions 200,000

Appropriation from donor restricted endowments 900,000

Total net assets released from restrictions 4,700,000

Total revenues, gains, and other support without donor restrictions $21,810,000

Total expenses $20,750,000

Increase in net assets without donor restrictions $1,060,000

Changes in net assets with donor restrictions

Contributions $4,200,000

Investment returns, net 100,000

Net assets released from restrictions (4,700,000)

Decrease in net assets with donor restrictions (400,000)

Increase in total net assets $660,000

Net assets at beginning of year $22,750,000

Net assets at end of year $23,410,000

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As with the current guidance, ASU 2016-14 requires the recognition of net assets released from restrictions in the period the stipulated time has elapsed, when the stipulated purpose has been fulfilled, or both. At that time, the amount is reclassified from net assets with donor restrictions to net assets without donor restrictions.

(1) The original $900,000 contribution was restricted to the renovation of the facility and the purchase of equipment. The NFP purchased $200,000 of equipment and spent $400,000 on facility renovations, which have been placed in service. The remaining $300,000 was spent on renovations not completed, and therefore remain donor restricted.

(2) In applying UPMIFA, the board appropriated 5%, or $400,000, of its donor-restricted endowment fund.

(3) The board appropriated $500,000 of the $1,500,000 donor-restricted net assets that the board had earlier designated as an endowment fund.

Total program expenses $3,000,000

Educational program equipment acquired and placed into service (1) 600,000

Time restrictions expired 200,000

Release of appropriated endowment amounts without purpose restrictions (2) 400,000

Release of appropriated endowment amounts with purpose restrictions (3) 500,000

Total restrictions released $4,700,000

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Investment gains and losses appropriated for operations are reclassified as operating activities; contributions to endowment funds are reclassified to non-operating activities.

Most gains and losses on investments and other assets or liabilities are recognized as increases or decreases in net assets without donor restrictions unless their use is restricted by explicit donor stipulations or by law.

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ASU 2016-14 permits the presentation of intermediate measures of operations. Because “intermediate measures of operations” is defined by the reporting entity, the update requires disclosure of the description of the nature of the term “operations” if it is not apparent from the details provided on the face of the financial statements.

Revenues are derived from transactions that are part of the NFP’s central activities.

Gains and losses from incidental or peripheral activities are derived from incidental and peripheral transactions that result from events and circumstances beyond the control of the NFP, such as the sale of property no longer needed and certain investment gains and losses.

20

In a change required by ASU 2016-14, external and direct internal investment expenses are netted against investment returns in the net asset category in which the net investment return is reported. In addition, these expenses are no longer required to be disclosed.

Direct internal investment expenses involve the direct conduct or direct supervision of the strategic and tactical activities involved in generating an investment return. These include costs associated with the officer and staff responsible for the development and execution of investment strategy, such as salaries, benefits, and travel, as well as other allocable costs associated with internal investment management and supervising, selecting, and monitoring external investment management firms.

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ASU 2016-14 to on Not-for-Profit Financial Statement

George I. Victor

Giambalvo Stalzer & Company

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ENDOWMENT FUNDS

Endowment Fund: An established fund of cash, securities, or other assets to provide income for the maintenance of a NFP. The use of the fund’s assets may be with or without donor-imposed restrictions. Endowment funds established by donor-restricted gifts may provide income either in perpetuity (permanent endowment) or for a specified period (term endowment). Donor-Restricted Endowment Fund: An endowment fund created by a donor stipulation requiring investment of the gift in perpetuity or for a specified term. Board-Designated Endowment Fund: An endowment fund created by a NFP’s governing board by designating a portion of its net assets without donor restrictions to be invested to provide income for a long, but not necessarily specified, period.

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Endowment funds are created either by one or more donors or by an NFP’s governing board.

Endowment funds created by a donor who stipulates restrictions on the use of the assets to specific activities, to specific future time periods, or in perpetuity are classified in net assets with donor restrictions.

Endowment funds created by an NFP’s governing board are generally reported in net assets without donor restrictions, because the governing board can reverse its decision to create the fund. ASU 2016-14 notes, however, that a board-designated endowment fund may include a portion of net assets with donor restrictions

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Changes in the accounting for net assets currently classified as permanently restricted reflect laws permitting appropriation by the NFP. The Uniform Prudent Management of Institutional Funds Act is a nationwide model for individual state legislation.

In New York State, the New York Prudent Management of Institutional Funds Act (NYPMIFA) permits the governing board, after considering eight specific factors, to appropriate a “prudent” expenditure of funds from a donor-restricted endowment fund (currently classified as permanently restricted net assets). At that time, the appropriated amount is reclassified from net assets with donor restrictions to net assets without donor restrictions.

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Underwater Endowment Fund: 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.

A donor-restricted endowment fund that is underwater should include the accumulated losses of that fund together with the related fund in net assets with donor restrictions and not in net assets without donor restrictions.

As seen in the next slide, donor restricted net assets include one endowment fund with an original balance of $8 million. It is deemed an underwater endowment fund because it incurred net unrealized losses of $500,000, leaving it with a balance of $7.5 million. Under the current guidance, the $500,000 unrealized loss is reflected in unrestricted net assets. Under ASU 2016-14, the unrealized loss is reflected in donor restricted net assets.

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Changes in Endowment Funds under ASU 2016-14

Board-Designated Endowment Funds

Donor-Restricted Endowment Funds

Total Endowment Net Assets

As originally reported $700,000 $8,00,000 $8,700,000

Underwater endowment (500,000) (500,000)

Total $700,000 $7,500,000 $8,200,000

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The NFP is required to disclose, in aggregate:

• Fair value of underwater endowment funds,

• Original endowment gift or other level required to be maintained by donor stipulation or law, and

• Amount of deficiencies in the underwater endowment funds.

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The NFP will also be required to disclose:

• The NFP’s governing board’s interpretation of relevant state UPMIFA laws affecting the ability to spend from the underwater endowment funds,

• The NFP’s policy for spending from underwater endowment funds, and

• Any actions taken during the period concerning appropriation of underwater endowment funds

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Liquidity and Availability of Resources

An NFP will be required to provide the following information displayed either on the face of the statement of financial position [or in the notes to financial statements, unless otherwise required on the face of the statement of financial position: a. Relevant information about the nature and amount of limitations on the use of cash and cash equivalents. b. Contractual limitations on the use of particular assets. c. Qualitative information in the notes to financial statements that is useful in assessing an entity’s liquidity and that 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. d. 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 communicates the availability of an NFP’s 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.

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The following disclosures, if applicable, may be combined with the disclosures required for qualitative information:

a. Unusual organization circumstances such as special borrowing arrangements, requirements imposed by resource providers that cash be held in separate accounts, and known significant liquidity problems.

b. The fact that the organization has not maintained appropriate amounts of cash and cash equivalents to comply with donor‐imposed restrictions.

c. Information about significant limits that result from contractual agreements, including the existence of loan covenants.

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An NFP should provide additional information about the liquidity or maturity of assets by any of the following:

a. Sequencing assets according to their nearness of conversion to cash and sequencing liabilities according to the nearness of their maturity and resulting use of cash

b. Classifying assets and liabilities as current and noncurrent

c. Disclosing in the notes to financial statements relevant information about the liquidity or maturity of assets and liabilities, including restrictions on the use of particular assets.

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An example of the disclosure required to describe qualitative and quantitative information is as follows:

NFP A has $395,000 of financial assets available within 1 year of the balance sheet date to meet cash needs for general expenditure consisting of cash of $75,000, contributions receivable of $20,000, and short-term investments of $300,000. None of the financial assets are subject to donor or other contractual restrictions that make them unavailable for general expenditure within one year of the balance sheet date. The contributions receivable are subject to implied time restrictions but are expected to be collected within one year. NFP A has a goal to maintain financial assets, which consist of cash and short-term investments, on hand to meet 60 days of normal operating expenses, which are, on average, approximately $275,000. NFP A has a policy to structure its financial assets to be available as its general expenditures, liabilities, and other obligations come due. In addition, as part of its liquidity management, NFP A invests cash in excess of daily requirements in various short-term investments, including certificate of deposits and short-term treasury instruments. As more fully described in Note XX, NFP A also has committed lines of credit in the amount of $20,000, which it could draw upon in the event of an unanticipated liquidity need.

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Cash Flow Presentation

• A NFP is still permitted to report cash flows from operating activities using either the direct or the indirect methods. If the direct method is used, a reconciliation to the indirect method is no longer required.

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Reporting of Expenses Functional Expenses • Under the current guidance, an analysis of expenses by both

natural classifications and functional classifications, typically reported as a statement of functional expenses, is only required to be used by health and welfare organizations.

• Under the new guidance, an analysis that disaggregates the functional expense classifications of all expenses by their natural expense classifications will be required by all NFPs.

• The analysis of expenses by function and nature will be required to be presented in the financial statements in one location, either on the face of the statement of activities, as a schedule in the notes to financial statements, or in a separate financial statement.

• Typically this would include disclosure of major classes of program services and supporting services.

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• After expenses are categorized into their functional class, they are further categorized by their natural expense classifications.

• 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 their natural expense classifications, such as salaries, rent, electricity, supplies, interest expense, depreciation, awards and grants to others, and professional fees.

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Investment Returns

• The new guidance now requires that investment return be reported net of related investment expenses, including both external and direct internal investment expenses.

• This is intended to provide a more uniform and comparable method to measure investment returns when comparing various NFPs, irrespective of whether the investment portfolio is managed internally, or by outside investment managers and consultants.

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ADDITIONAL FASB CHANGES

ASU 2016-14 was amended by

• ASU 2016-18, Restricted Cash, and

• ASU 2017-02, Clarifying When a Not-for-Profit Entity That Is a General Partner or a Limited Partner Should Consolidate a For-Profit Limited Partnership or Similar Entity.

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ASU 2016-18 requires that cash restricted by donors and other outsiders be combined with unrestricted cash in the statement of cash flows.

This Update is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, this update is effective for fiscal years beginning after December 15, 2018.

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ASU 2017-02 applies to an NFP that is a general partner or a limited partner of a for-profit limited partnership or a similar legal entity. A similar legal entity is an entity such as a limited liability company that has governing provisions that are the functional equivalent of a limited partnership.

This Update retain the consolidation guidance that NFPs that are general partners continue to be presumed to control a for-profit limited partnership, regardless of the extent of their ownership interest, unless that presumption is overcome.

This Update also adds guidance on when an NFP limited partner should consolidate a for-profit limited partnership.

ASU 2017-02 is effective for NFPs for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. Early adoption is permitted.

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In August 2017, FASB issued the Proposed Accounting Standards Update, Not-for-Profit Entities (Topic 958), Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. The stated objectives of the Proposed Update are to:

• Provide a more robust framework to determine when a transaction should be accounted for as a contribution under Subtopic 958-605 or an exchange to be accounted for under other guidance, such as Topic 606; and

• Clarify the guidance about whether a contribution is conditional or unconditional.

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FASB is contemplating a second phase of the financial reporting project that addresses intermediate measures of operations, defining such measures, and aligning the operating definitions in the statements of activities and cash flows.

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Financial statement preparers should review ASU 2016-14 to determine its effect on their own particular circumstances and whether they need to expand their current financial statement disclosures.

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