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Implementing FASB ASU 2016-14 Not-For-Profit Financial

Statement Reporting

THURSDAY, APRIL 18, 2019, 1:00-2:50 pm Eastern

FOR LIVE PROGRAM ONLY

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FOR LIVE PROGRAM ONLY

mailto:[email protected]

THURSDAY, APRIL 18, 2019

Implementing FASB ASU 2016-14 Not-For-Profit Financial Statement Reporting

Kenneth Euwema, Vice President, Controller

United Way Worldwide, Alexandria, Va.

[email protected]

Lee Klumpp, Director

BDO USA, Bethesda, Md.

[email protected]

Notice

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY

THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY

OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT

MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR

RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

You (and your employees, representatives, or agents) may disclose to any and all persons,

without limitation, the tax treatment or tax structure, or both, of any transaction

described in the associated materials we provide to you, including, but not limited to,

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.

5 ASU 2016-14 Not-For-Profit Reporting Standards

Financial Accounting Standards Board’s ASU

2016-14 Not-For-Profit Reporting Standards

ASU 2016-14 Not-For-Profit Reporting Standards6

Key Provisions of ASU 2016-14

Net Asset Classification

Updated net asset classification scheme to two classes, changes to

underwater endowment accounting, enhanced disclosures

Liquidity & Availability

Quantitative & qualitative disclosures about liquidity and

availability of resources Expenses

Requirement to report expenses by function (already required), nature,

and an analysis showing the relationship between function and

nature

Statement of Cash Flows

Continue to allow direct or indirect method for operating cash flows; indirect reconciliation no longer

required for direct method

Investment Return

Present investment return net of external and direct internal

investment expenses, no longer required to disclose netted

expenses


Objectives and Effective Date


Update, not overhaul, the current model

Improve net asset classification scheme

Improve information in financial statements and notes about:

• Financial performance

• Cash flows

• Liquidity

Better enable NFPs to “tell their financial story”

Provide more useful information to donors and other users of the financial

statements

NFP Financial Statements Project—Key Objectives (recommended by FASB’s NFP Advisory Committee (NAC))

8


Effective Date

Presentation of Financial Statements of NFPs, ASU 2016-14

Effective Date: For fiscal years beginning after 12/15/2017

Interim financials the following year

• Calendar year ending 12/31/18

• Fiscal year ending 6/30/19


Net Assets


Net Assets

UnrestrictedTemp.

RestrictedPerm.

Restricted

Without Donor Restrictions

With Donor Restrictions

Amount, purpose, and type of board

designations *

Nature and amount of donor restrictions

Current

GAAP

Proposed GAAP

Disclosures

+

* New disclosure requirement


Example Effect on Statement of Financial Position

Note: Shaded lines are required to be presented.

Source: ASU 958

Not-for-Profit Entity A

Statements of Financial Position

June 30, 20X1 and 20X0

(in thousands)

20X1 20X0

Assets:

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 (Note DD) 92,600 84,570

With donor restrictions (Note B) 193,490 186,070

Total net assets 286,090 270,640

Total liabilities and net assets $ 296,720 $ 282,980


Example Effect on Statement of Financial Position


Source: ASU 958

Net assets:

Without donor restrictions (Note DD) 92,600 84,570

With donor restrictions (Note B) 193,490 186,070

Total net assets 286,090 270,640

Total liabilities and net assets $ 296,720 $ 282,980



Source: ASU 958-205-55-14

EXAMPLE OF EFFECT ON STATEMENT OF ACTIVITIES - COLUMNAR FORMAT

Example of Effect on Statement of Activities -

Columnar Format


Disclosures Related to Net Assets

Amounts and purposes of governing board designations, appropriations, and

similar actions that result in self-imposed limits on the use of resources without

donor-imposed restrictions as of the end of the period.

Composition of net assets with donor restrictions at the end of the period and

how the restrictions affect the use of resources.

Additional information related to underwater endowment funds.


Disclosures Related to Net Assets

Information about the nature and amounts of different types of donor-imposed

restrictions should be reported either on the face of the statements or in the

notes. Separate line items that distinguish between the different types of

restrictions may be used such as:

• Assets, such as land or works of art, donated with stipulations that they

be used for a specified purpose, be preserved, and not be sold.

• Assets donated with stipulations that they be invested to provide a

permanent source of income.

• Support of particular operating activities.

• Investment for a specified term.

• Use in a specified future period.

• Acquisition of long-lived assets.


Net Asset Disclosure Example

Excerpt from ASC 958-210-55-3

With donor restrictions

Perpetual in nature 200,000$

Purpose restricted 1,840,000

Time-restricted only, for periods after 20X1 150,000

2,190,000$

Without donor restrictions

Designated by the Board for [purpose] 1,000,000$

Undesignated 24,000,000 25,000,000

Net assets 27,190,000$


“Underwater” Endowments

19

• To be reflected in net assets with donor restrictions rather than in net assets without donor restrictions

Revised net asset classification

• In addition to aggregate amounts by which funds are underwater (current GAAP), also disclose aggregate of original gift amounts (or level required by donor or law) for such funds, fair value, and any governing board policy or decision to reduce or not spend from such funds.

Enhanced disclosures


Operating Measure: Improved Disclosures

For those NFPs that utilize an operating measure and show governing

board designations, appropriations, and similar actions (internal

transfers) in the measure:

These NFPs must report these types of internal transfers

appropriately disaggregated and described by type (either on the

face of the financial statements or in the notes).


Example of Operating Measure Presentation

Source: ASU 958-225-55-17


Implementation Issues – Net Assets

➢ In order to change from three classes of net assets to only two classes, NFPs will

have to perform a detailed review of their organization’s records to make sure

all funds are classified correctly.

➢ The new standard requires reporting of underwater amounts of donor-restricted

endowment funds in net assets with donor restrictions. The standard also

enhances disclosures about underwater endowments. Therefore, underwater

amounts previously reported in unrestricted funds must be reclassified to net

assets with donor restrictions.

➢ Subcategories of net assets classes should be established and reviewed with

audit committee, if organization wishes to report subcategories.

➢ Organizations should ensure policies are in place to reflect new disclosure

requirements in relation to net assets.


Expiration of Capital Restrictions

Gifts of cash restricted for acquisition or construction of PP&E

NFPs would be required to use the placed-in-service approach (no more

implied time restrictions) unless there is a donor explicit stipulation of a time

period for the use of assets

Reclassify any amounts from net assets with donor restrictions to net assets

without donor restrictions for such long-lived assets that have been placed in

service as of the beginning of the period of adoption (thus eliminating the

current option to release the donor-imposed restriction over the estimated

useful life of the acquired asset).

Approach for reporting expirations on gifts of capital assets:

Does your organization use the placed-in-service approach? If not, your

organization will have to adopt it, taking into account any donor explicit

stipulations


Implementation Issues – Capital Restrictions

➢When examining the effect of the ASU on your organization, you should look at

whether you have any contributions of long-lived assets that are being

reclassified over time without any explicit stipulation of a time period for the use

of the asset. If these assets have already been placed in service, the amount of

these long-lived assets should be reclassified from net assets with donor

restrictions to net assets without donor restrictions upon adoption of the ASU.

➢In addition, the organization will have to modify its policy with regard to the

receipt of contributions for the construction of long-lived assets or donated long-

lived assets. Upon adoption of the ASU, an organization will have to recognize

revenue without donor restrictions when the donated assets are placed in service

absent any explicit donor stipulations otherwise. In the past, organizations had

an option to either follow the placed-in-service approach or to place an implied

time restriction on the long-lived assets.


Liquidity


Liquidity and Availability of Resources

NFPs required to

provide:

Qualitative information on how an NFP manages its liquid available resources and its liquidity risk (in

the notes)

Quantitative information that communicates the availability of an NFP’s financial assets at the

statement of financial position date to meet cash needs for general expenditures within one year (on

the face and/or in the notes)

Examples from early adopters demonstrate three ways to provide the required information



Qualitative

NFPs are required to communicate how they manage their liquid

resources available to meet cash needs for general expenditures

within one year of the date of the statement of financial

position. Additionally, NFPs should disclose any of the following:

a. Unusual 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 NFP has not maintained appropriate

amounts of cash and cash equivalents to comply with donor-

imposed restrictions.

c. Information about significant limits resulting from

contractual agreements with suppliers, creditors, and others,

including the existence of loan covenants.



Quantitative

NFPs are required to communicate the availability of their

financial assets at the statement of financial position date

to meet cash needs for general expenditures within one

year (on the face and/or in the notes).

Availability of a financial asset may be affected by (1) its

nature, (2) external limits imposed by donors, grantors,

laws, and contracts with others, and (3) internal limits

imposed by governing board decisions.


Quantitative and Qualitative Liquidity and

Availability of Resources Disclosure Example

Source: ASU 958-210-55-8


Quantitative and Qualitative Liquidity and

Availability of Resources Disclosure Example

Source: ASU 958-210-55-8

Note T (Continued)

NFP A’s endowment funds consist of donor-restricted endowments and a quasi-endowment. Income

from donor-restricted endowments is restricted for specific purposes and, therefore, is not

available for general expenditure. As described in Note Y, the quasi-endowment has a spending

rate of 5 percent. $1.65 million of appropriations from the quasi-endowment will be available

within the next 12 months.

As part of NFP A’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. In addition, NFP

A invests cash in excess of daily requirements in short-term investments. To help manage

unanticipated liquidity needs, NFP A has committed lines of credit in the amount of $20 million,

which it could draw upon. Additionally, NFP A has a quasi-endowment of $33 million. Although NFP

A does not intend to spend from its quasi-endowment other than amounts appropriated for

general expenditure as part of its annual budget approval and appropriation process, amounts

from its quasi-endowment could be made available if necessary. However, both the quasi-

endowment and donor-restricted endowments contain investments with lock-up provisions that

would reduce the total investments that could be made available (see Note X for disclosures about

investments).


Quantitative Disclosure of Financial Asset Availability

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 apropriation 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$

* Total assets, less nonfinancial assets (e.g., PP&E, inventory, prepaids)

** Excludes amounts that have been appropriated for next 12 months that do not have purpose restrictions

Source: ASU 958-205-55-21


Implementation Issues –Liquidity and Availability

➢NFPs will now have to show disclosures that will reflect how much of their assets

are in reserve and not available for use. If these analyses were not done in the

past, some results may be surprising.

➢NFPs will have to decide whether they should report a classified statement of

financial position.

➢If not previously formalized, NFPs will now have to have an established plan in

place to report on availability of unrestricted liquid assets as of the date of the

statement of financial position to meet operating cash needs within one year of

the statement date.

➢NFPs may want to look at establishing an operating reserve as part of its process

of managing liquidity. We suggest looking at the Net Operating Reserve Initiative

Project.


Expenses


Expense Reporting

Report expenses, either on the face of financial statements or in the notes, by:

• Function *

• Natural classification

• Analysis (disaggregate function by nature)

• Cannot be presented as supplemental information

* currently required in GAAP

NFPs are now required to provide qualitative disclosures about methods used to

allocate costs among program activities and supporting services

ASU 2016-14 also provides enhanced guidance on allocations from management

and general (M&G) expenses

• Key concept: direct conduct or direct supervision


Expense Reporting

Additional Information

• If expenses are reported in other line items within the statement of activities

(e.g., salaries are included in costs of goods sold) they should be included in

the functional reporting schedule by their natural classification.

• External and direct internal investment expenses that are netted against

investment return should not be included in the functional expense analysis.


For example: 958-205-55-21 Note F (Page 66 of ASU)

Expenses By Both Nature and Function


Management and General Expenses (958-720-45-7)

Management and general activities include the following:

a. Oversight

b. Business management

c. General recordkeeping and payroll

d. Budgeting

e. Financing

f. Soliciting funds other than contributions and membership dues (see examples

included in above section)

g. Administering government, foundation, and similar customer-sponsored

contracts, including billing and collecting fees and grant and contract financial

reporting


Management and General Expenses (958-720-45-7)

Management and general activities include the following (continued):

h. Disseminating information to inform the public of the NFP’s stewardship

of contributed funds

i. Making announcements concerning appointments

j. Producing and disseminating the annual report

k. Employee benefits management and oversight (human resources)

l. All other management and administration except for direct conduct of

program services (see paragraphs 958-720-55-171-55-176 for examples)


Management and General Expenses

“The costs of oversight and management usually include the salaries

and expenses of the governing board, the chief executive officer of

the NFP, and the supporting staff. If such staff spend a portion of

their time directly conducting or supervising program services or

categories of other supporting services, however, their salaries and

expenses shall be allocated among those functions.” (958-720-45-8)


Direct Conduct or Direct Supervision

“Activities that represent direct conduct or direct supervision of

program or other supporting activities require allocation from

management and general activities. Additionally, certain costs benefit

more than one function and, therefore, shall be allocated. For

example, information technology generally can be identified as

benefiting various functions, such as management and general (for

example, accounting and financial reporting and human resources),

fundraising, and program delivery. Therefore, information technology

costs generally would be allocated among the functions receiving

direct benefit.” (958-720-45-2A)



Case A in ASU: Chief Executive Officer Allocation

The broad responsibilities of a chief executive officer generally include

administrative and programmatic oversight. At Not-for-Profit Entity A

(NFP A), the chief executive officer spends a portion of time directly

overseeing the research program. Additionally, a portion of time is

spent with current and potential donors on fundraising cultivation

activities. A portion of the chief executive officer’s compensation and

benefits and other expenses would be allocated to the research

program and to the fundraising function representing the portion of

time spent on those activities because they reflect direct conduct or

direct supervision. If the remainder of the chief executive officer’s

time is spent indirectly supervising the other areas of NFP A, including

the administrative areas, those activities would not constitute direct

conduct or direct supervision, and the ratable portion of compensation

and benefit amounts would remain in management and general

activities.



Case C in ASU: Human Resources Department Allocation

The human resources department at Not-for-Profit Entity C (NFP C)

generally is involved in the benefits administration for all personnel of

NFP C. The human resources department’s related costs would not be

allocated to any specific program. Rather, those costs would remain a

component of management and general activities because benefits

administration is a supporting activity for the entire entity.


Example Disclosure for Expense Allocation Disclosure

NOTE X. METHODS USED FOR ALLOCATION OF EXPENSES FROM

MANAGEMENT AND GENERAL ACTIVITIES (ASU 958-720-55-176)

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 and amortization, the president’s office,

communications department, and information technology department.

Depreciation is allocated based on square footage, the president’s office is

allocated based on estimates of time and effort, certain costs of the

communications department are allocated based on estimates of time and effort,

and the information technology department is allocated based on estimates of

time and costs of specific technology utilized.


Implementation Issues – Reporting of Expenses

➢Nonprofits should review their allocation methodologies to determine if there are any

changes that are necessary to comply with the ASU.

➢Once the allocation methodologies are implemented, nonprofits should decide how to

present this analysis in their financial statements and develop the format.

➢Nonprofits may need to evaluate the different programs and supporting activities to

determine if the methodology and presentation is complete and accurate.

➢Nonprofits will also have to develop wording for its allocation methodology disclosure.

➢In developing the disclosures, a nonprofit should assess which activities constitute

direct conduct or direct supervision of a program or supporting function, and,

therefore require an allocation of costs.


Investment Return


Reporting of Investment Return

Net presentation of investment expenses against

investment return on the face of the statement of activities

• Netting limited to external and direct internal expenses

Disclosure of investment expenses no longer required

No longer require disclosure of investment income components


Investment Return

Direct internal investment expenses involve the direct conduct or direct

supervision of the strategic and tactical activities involved in generating

investment return including:

• Salaries, benefits, travel, and other costs associated with the officer and

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.

Direct internal investment expenses do not include items that are not

associated with generating investment return. For example, the costs

associated with unitization and other such aspects of endowment

management would not be allocated.


Implementation Issues – Reporting of Investment

Return

➢Only the net amount of the investment return related to total return investing is

required to be presented in the statement of activities.

➢Programmatic investing, or any financial activity that directly carries out a

nonprofit’s mission or purpose, such as a loan made to lower-income individuals

to promote home ownership is not included in this net presentation.

➢To comply with this presentation, organizations need to fully understand the

definitions of these terms and then consider how to appropriately and accurately

capture this information.

➢Accounting for investment expenses and the related allocation of costs is a

process that organizations will have to develop to properly present these

investment costs under the provisions of the ASU. The complexity will depend on

the type of organization and the amount and nature of their investments.


Cash Flow Statement


Cash Flow Statement

Continue to allow free choice between the Direct Method and the Indirect

Method

• However the Indirect Reconciliation will no longer be required if the NFP

chooses to use the Direct Method


Implementation Issues – Cash Flow Statement

Discussion should be held among management and those charged with

governance on current method of cash flow and determination of whether any

changes will be made in terms of direct versus indirect methods.

Discussion should include the pros and cons of both methods.

If determination is made to switch to alternative cash flow method,

information gathering should take place to ensure the information is accessible

for the desired reporting structure.


Implementation Reminders


Early Adoption and Transition

Presentation of Financial Statements of NFPs, ASU 2016-14

Early Adoption: Permitted, but must apply the regular transition provisions

Transition:

• For year of adoption: apply all provisions.

• For comparative years presented: apply all provisions, except can choose

not to present for the prior year(s) presented:

‐ Analysis of expenses by nature and function, and/or

‐ Disclosures around liquidity and availability of resources


Important Notes

NFPs are already permitted to incorporate many of the changes in the ASU. The

only changes that cannot be done without formally adopting the ASU are:

(1) Presenting one class of restricted net assets (consolidating temporarily and

permanently restricted)

(2) Underwater endowment presentation

(3) Eliminate disclosures of investment return components and netted expenses

(4) Eliminate requirement to provide indirect reconciliation if using direct

method for operating cash flows


Implementation Issues - General

➢Each NFP needs to develop an implementation plan for ASU 2016-14.

➢Policies and procedures may have to be updated in order to comply with the

FASB update. This should be done as early as possible and not wait until the end

of the first fiscal year under implementation.


How to Get Ready – Items to Consider


How to Get Ready – Items to Consider!

Item #1

Financial

Report

changes

Consider whether it

would be helpful to

prepare a “classified”

Statement of Financial

Position

Revise report columns to

reflect new net asset

classes

Determine whether your

organization wants to

present comparative

statements in the year of

adoption

Determine whether your

organization wants to

present direct or indirect

method of cash flow

statement



Item #2

Board-

designated

funds

Does the policy outline

how board-designated

funds are funded and

drawn down?

Does your organization

have a policy for the

commitment of board-

designated funds?

Does the board periodically

review disbursements from

board designated funds?



Item #3

Endowment

Spending

Has your organization

followed its own

endowment spending

policy?

How are appropriation

amounts determined?

What is your board’s

interpretation of its ability to

allow spending from donor-

restricted endowment funds if

amounts fall below original gift

amounts?



Item #4

Liquidity

Management

What level of financial

assets does your

organization strive to

maintain for daily

requirements?

What resources are

available for unanticipated

needs?

What is the policy for how

cash in excess of daily

requirements is handled?

How does your

organization manage

liquidity?



Item #5

Cost

Allocation

Methodologies

How is your organization‘s

allocation policy aligned

with the clarified

definition of Management

and General?

How are salaries of

supporting staff

allocated?

Understand how costs are

currently allocated among

program and support

functions

Which expenses are

based on direct costs and

which are allocated?

Develop a memo of

your allocation

process. This will be

helpful in developing

your policy footnote.



Item #6

New

Footnote

Disclosures

Prepare qualitative and

quantitative

information on liquidity

and cash availability

Prepare composition of

net assets with donor

restrictions disclosures

Prepare expense

analysis with disclosure

of cost allocation

methods

Prepare board-

designated assets

disclosures

Prepare underwater

endowment funds

disclosures

Prepare operating

measures disclosures


Resources


Resources• BDO’s Institute for Nonprofit Excellence Resource Center for our FASB Financial Reporting Guidance

page for information on ASU 2016-14 that includes:

➢ podcasts and videos

➢ articles and blog posts

➢ Links to FASB Resources

https://www.bdo.com/resource-centers/institute-for-nonprofit-excellence/fasb-financial-reporting

https://www.bdo.com/resource-centers/institute-for-nonprofit-excellence




Resources

• BDO’s Publication:

How to Read Nonprofit

Financial Statements:

A Practical Guide

➢https://www.bdo.com/resource-centers/

institute-for-nonprofit-excellence/book-promo

https://www.bdo.com/resource-centers/institute-for-nonprofit-excellence/book-promo






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