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 are 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: Disclosure of Underwater Endowment Funds

An underwater endowment fund arises when the fair-market value of the fund assets are less than the original donor gift or the amount required to be maintained in perpetuity by donor. The net asset classification of the underwater amounts of donor-restricted endowment funds has been changed (the underwater amount remains in the donor-restricted category – previously it was included in the unrestricted category). Additional aggregate disclosures for underwater endowment funds are now required, such as the current fair value of the assets of the funds, the amount of the original donor gift and amount of the deficiency. Additionally, the organization’s ability to spend from underwater endowment funds and actions taken by management during the period around spending from underwater endowments needs to be disclosed. Quasi-endowment funds, which are designated by an organization’s board rather than a donor, should be reported as net assets without donor restrictions and the above disclosures only apply to donor restricted endowments.

Why is it changing?

The goal is to provide more information on aggregate deficiencies and provide more context around the organization’s policy around appropriation from underwater funds.

Implementation Considerations for Your Foundation:

• How do you track original donor gifts?
• How do you track endowment underwater funds? If the tracking is manual, can this be systematized?
• Does your organization have a policy on the ability to spend from underwater funds?

Key Change: Statement of Functional Expenses

Nonprofits are all now required to present natural expenses (i.e., salaries, benefits, rent, grant expense, training, etc.) by function (program, general and administrative and fundraising). Previously only voluntary health and welfare organizations were required to include a statement of functional expenses. Therefore, foundations must now break out program (which includes grantmaking) and management and general/administrative costs separately as most private foundations do not fundraise. Options are to add separate statement, disclose within the footnotes or within the statement of activities.

Implementation Considerations:

• Is there a management preference on presenting as a separate statement, within the statement of activities or within the footnotes?
• Has your organization drafted a cost allocation policy?
• How does your organization define program? For most foundations grantmaking would be the category but in some cases there could be other program areas that should be disclosed.
• What is the best allocation method? The most common are hours worked and square footage depending on the natural category (i.e., salaries may be based on hours worked while rent and utilities may be based on square footage).
• Are there investment expenses that should be excluded from the statement since they will be netted against investment income? Click here for more information on investment expense treatment.

Key Change: Liquidity Disclosure

A new presentation of qualitative and quantitative information to enable a reader to assess available financial resources and the organization’s management of liquidity and liquidity risk is now required. Qualitative information on how a foundation manages its liquid available resources and its liquidity risk is required to be disclosed in the notes. Quantitative information that communicates the availability of a foundation’s financial assets at the balance sheet date to meet cash needs for general expenditures within one year is required to be disclosed on the face of the financials and/or in the notes.

Why is it changing?

The goal is to provide additional transparency and information to users of nonprofit financial statements on the overall financial health and liquidity of an organization.

Implementation Considerations:

• Do you have a line of credit to cover short-term liquidity needs?
• Should timing of capital calls be considered?
• Are there any board restrictions that should be excluded?
• Do any investments have redemption restrictions are therefore should be excluded?
• Are there any assets that should be excluded that may not be converted to cash within the next year? For example, long-term receivables or property?
• Have you entered into any significant commitments that should be factored in?
• How do you define general operating expenditures as an organization? The ASU does not specifically define and management can use their judgement in how to present. Consider including management’s definition in the footnotes to provide clarity to users of the financials.

Final Thoughts

• The IRS has not revised the 990 and 990-PF to align with the new standard, which will cause differences between financial statements and the informational returns.
• The new guidelines require that donor restrictions should be released when assets are placed in service rather than releasing donor restrictions over estimated useful life (unless otherwise stipulated by the donor).
• These changes apply to your grantees as well. This is an opportunity to learn more about the financial health of your grantees and may result in more informed grantmaking. The liquidity disclosures may give more insight into the timing and type of support your grantees may benefit from the most.