Armanino Blog

FASB Update Part 1: Reshapes Nonprofit Reporting

by Stacie Kowalczyk
December 13, 2016

Part 1: Net asset classification

The Financial Accounting Standards Board (FASB) has issued the most sweeping changes to nonprofit financial reporting since the early ‘90s. These much-anticipated updates are specifically designed to provide a financial statement user with a clearer picture of your nonprofit’s liquidity, financial performance and cash flows.

Practically speaking, the new accounting standards will dramatically impact the financial reporting seen by your donors, board and executive director.

To help nonprofits prepare, Armanino has provided a deep dive into the new standards, including guidance on implementation. We begin this series with a look at changes to how your organization classifies its assets.

Net Asset Classification
Nonprofit financial statements have traditionally broken assets into three categories: restricted, temporarily restricted and permanently restricted.

Under the new FASB accounting standards, assets will simply be categorized either as “with donor restrictions” or “without donor restrictions.” This streamlining of asset classes is intended to reduce complexity and make the information more understandable to donors and internal users.

Note that disclosures are still required to include information about the nature and amounts of donor imposed restrictions, including time, purpose and perpetuity.

You’ll also need to be aware of these additional changes to asset reporting:

  • Underwater endowments will be reported as donor-restricted net assets. Nonprofit endowment funds have always been at risk of being “underwater.” Whipsawing markets can easily turn a $10 million endowment into a $9.2 million endowment.

    Traditionally, that $800,000 loss in value would have hit your unrestricted net assets.

    Under the new accounting standards, the underwater portion will be classified as “net assets with donor restrictions.” Additional disclosures are required, including the fair value of the funds, the aggregate of the original gift amount and the amount by which funds are underwater.

  • Internally designated funds (e.g., board designated endowments or “quasi endowments”) will require disclosures. Quasi-endowments are funds earmarked by the board—rather than by donors—to act like permanently restricted funds from which income is available for general operations (e.g., a “rainy day fund”) or certain specific purposes. Accordingly, these funds will be reported as “without donor restrictions.” You will also be required to disclose the amount and purpose of any board-designated net assets either on the face of the financial statements or in the notes.

    If you haven't already, formalize any internal resolutions regarding treatment of internally designated funds at your nonprofit. You might also consider whether establishing a formal reserve is appropriate.

Our Recommendations
As you consider how these accounting changes will impact your financial reporting, we offer these general recommendations:

  1. Keep the face of your financial statements clean. An overarching goal of the new accounting standards is to simplify your nonprofit’s financial reporting. For example, a streamlined Statement of Financial Position could be as basic as this:

    Net Assets 2015 2016
    Without donor restrictions $45,206,000 $44,891,000
    With donor restrictions $12,300,000 $11,500,000
    Total net assets $57,506,000 $56,391,000

    Or, it could drill deeper with detail like this:

    Net Assets    
    Without donor restrictions 2016 2015
              Board designated endowment $4,000,000 $3,500,000
              Capital replacement reserves
    $1,100,000 $900,000
              Undesignated $40,106,000 $40,491,000
              Total net assets without donor restrictions
    $45,206,000 $44,891,000
    With donor restrictions 2016 2015
              Restricted for a specific purpose $3,000,000 $3,400,000
              Restricted to passage of time
    $2,200,000 $3,500,000
              Subject to NFP appropriation and spending policy
    $6,000,000 $3,500,000
              Held in perpetuity
    $1,100,000 $1,100,000
              Total net assets with donor restrictions
    $12,300,000 $11,500,000

    The trick is to select a degree of detail appropriate to your organization’s complexity and financial reporting needs—but not so much that it obscures what the data is actually saying.

    Because your board is one of the primary users of your financial statements, consider involving the entire board or the audit/finance committee early in the process of determining the best presentation of the numbers.

  2. Provide additional disclosures in footnotes. Disclosures of specific restrictions on when resources can be used and for what purposes become even more important with the new reporting model. Yet, if your organization’s goal is to present a clean statement, you’ll probably want to present much of this detail as footnotes. For example, consider this disclosure of board-designated funds:

    Note DD

    Not-for-Profit Entity A’s governing board has designated, from net assets without donor restrictions, net assets for the following purposes as of June 30, 20XX.

    Board designated endowment           4,000,000
    Capital replacement reserve              1,100,000
    Total                                              5,100,000

  3. Maintain your internal chart of accounts. Quite a few not-for-profit organizations maintain extensive assets in Excel as part of their general ledger. At this point, we don’t believe there is any need to change that. You still have fiduciary responsibility over those assets, so it is a good idea to keep them separated internally.

  4. Keep an eye on the time. Implementation of the new accounting standards is effective for fiscal timelines beginning after December 15, 2017. For most of our clients, that will either be the Dec. 31, 2018, calendar year or the fiscal year ending June 30, 2019.

  5. Think through early adoption. Early adoption is certainly an option. Just be aware that you’ll have to adopt every aspect of the new accounting standards—not just the changes to net asset classification. As an interim step, consider preparing pro forma financial statements following the new rules to see how they will affect your organization’s financial reporting. You can create a mockup of your most recently issued GAAP financial statements using the new requirements and then present it to management and the board for their feedback.

    As you think through the impact the new accounting standards will have on your financial statements, turn to the nonprofit accounting team at Armanino for answers.

December 13, 2016

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