The Financial Accounting Standards Board’s (FASB) Accounting Standards Update (ASU) No. 2016-14 “Not-for-Profit Entities (Topic 958): Presentation of Financial Statement of Not-for-Profit Entities” is the biggest change to nonprofit financials in years. In our two-part series “How and Why Private Foundation Financial Statements Changing Under ASU 2016-14,” GHJ Nonprofit Leader Amy Eybsen illustrates what changes the ASU is bringing for private foundations. She will outline the reasons behind FASB issuing the changes and what steps your Foundation should take to effectively implement the standard.
ASU 2016-14 is effective for organizations with fiscal years beginning after December 15, 2017. Many Foundations have year-ends of December 31, 2018 and June 30, 2019. All provisions of the ASU must be applied and in the case of comparative financials, for prior years presented, all provisions apply, with the exception of the analysis of expenses by nature and function and/or disclosures around liquidity and availability of resources.
Key Change: Net Asset Classifications
Net assets categories have new descriptions:
- Unrestricted is now “without donor restrictions”
- Temporarily and permanently restricted are now grouped together as “with donor restrictions”
The new standard retains the current requirement to provide information about the nature and amounts of different types of donor-imposed restrictions, highlighting how those restrictions affect the use of resources. Any board-designated funds would also fall under “without donor restrictions.”
Why is it changing?
The goal is to highlight the fact that what was formerly temporarily and permanently restricted are donor restrictions (rather than board restrictions). Additionally, the goal is to improve disclosure of board-designated funds. Board-designated funds are not as common with private foundations, but you may see on grantee’s financials if their boards have set aside reserves or quasi endowments for specific purposes or capital projects.
Implementation Considerations for Your Foundation:
- Most foundations only have unrestricted funds, so this will be an optical change on the statement of financial position and statement of activities to change from “unrestricted” to “without donor restrictions.” Consider making the change on internal financials and within the chart of accounts for consistency.
- Determine if your organization has any board designations or reserves. If any of these exist, your Foundation will need to decide if you want to disclose on the face of the statement of financial position or within a footnote. If disclosed within a footnote, they can either be disclosed in a narrative format or tabular format.
Key Change: Cash flow statement:
Under current GAAP either the indirect or direct method are allowed, but if the direct method is used, a reconciliation from the direct to the indirect method must be disclosed. The indirect method shows the reconciliation of change in net assets to the change in cash during the year and the direct method shows receipts and payments of cash (i.e. investment income and grants paid). The ASU takes away the requirement to disclose the indirect reconciliation if a foundation uses the direct method.
Why is it changing?
The goal is to simplify financial reporting for those who choose to use the direct method. According to AICPA surveys many financial statement users see the direct method as more useful than the indirect method, however it may be more time consuming and costly for organizations to implement.
Implementation Considerations for Your Foundation:
- If your foundation uses the direct method you are no longer required to show the indirect reconciliation. However, nonprofits still have the option to if preferred.
Key Change: Investment Return
Under the new ASU, investment return is now presented net, with no separate breakout of interest and dividends, realized and unrealized, and management fees. Currently, this breakout is required to be disclosed. Additionally, now all external and direct internal investment management and custodial expenses should be netted against the return. Internal expenses include the direct conduct or direct supervision of the strategic and tactical activities involved in generating investment return (i.e. salaries, benefits, travel and other costs that may currently be classified in administrative costs on the statement of activities). These costs would be netted against investment return and excluded from the statement of functional expenses.
Why is it changing?
The goal of the new standard is to make organizations financial statements more comparable. Many investments have imbedded management fees that are already included in the return while other types of investments may be managed internally or the fees are not included in the return. A consistent methodology of reporting the return will give a more accurate and consistent picture of returns across nonprofits.
Implementation Considerations for Your Foundation:
- Determine if management is involved in portfolio management. If so, determine what portion of their time is spent on this versus other activities. This portion of their salary, taxes and benefits could be broken out and netted against investment return.
- Are there any travel or conference expenses that relate to portfolio management and generating investment return? These direct costs could also be tracked and netted against investment income.
- Does your foundation make Programmatic Investments (PRI’s)? If so, related expenses are not required to be broken out as PRI’s are an exception per the ASU.
Stay tuned for next week’s blog where Amy will review the key changes related to endowment disclosures, statement of functional expenses and new liquidity disclosures.
