Big Changes Coming for Financial Reporting of Not-for-Profit Organizations – Part 5: Accounting for Donor Restrictions on Gifts of Property and Equipment

Posted on Nov 3, 2016

By Andrew Prather, CPA

Updated June 12, 2018: Content changed to include the impact of this change on capital campaign activities and capital fundraising.

Recap

On August 18, 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-14 “Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities.”  ASU 2016-14 requires a number of changes to the financial statements of NFPs.  These changes will be effective for fiscal years beginning on or after December 15, 2017.

This article is the fifth in a series discussing the changes required by ASU 2016-14.  In this article, we discuss changes to accounting for donor restrictions on gifts of property and equipment. 

Background

Not-for-profit organizations (NFPs) sometimes receive contributions of cash or other assets that are restricted by the donor for the purchase of property and equipment.  For example, a private school NFP might receive a contribution of cash from a donor with the restriction that the cash be used to purchase computers.

NFPs sometimes also receive contributions of property and equipment.  For example, that same private school NFP might receive a contribution of computers from a donor instead of cash.  Often with these types of contributions, the donor does not expressly stipulate how or for how long the asset must be used by the NFP or how to use any proceeds resulting from the assets disposal.

U.S. GAAP has allowed three options that NFPs may choose from to account for these types of contributions.  The first option is to adopt an accounting policy to imply a time restriction that expires over the useful life of the donated asset, or the asset purchased with contributions restricted to the purchase of the that asset.  The result of this option is that all donations of property and equipment, or contributions restricted to the purchase of property and equipment, are recorded as restricted contribution revenue.  The restriction is then released on a pro-rata basis each year over the life of the property and equipment.

The second option is to adopt an accounting policy to not imply a time restriction. The result of this option is that all donations of property and equipment are recorded as unrestricted contribution revenue.  Contributions restricted to the purchase of property and equipment are recorded as restricted contribution revenue upon receipt, but then the restriction is released when the property or equipment is placed in service.

The third option is the same as the second option, except that the restriction is released as the funds are spent.  This option is often used in longer-term construction projects associated with capital campaigns.

During its research and outreach in developing its new standard for NFPs (ASU 2016-14), the FASB found that all three options are currently being used in the NFP sector; however, the first option is the least utilized.

What is Changing?

To standardize the accounting practice for these contributions, the FASB is eliminating the first and third options.  With the implementation of ASU 2016-14, NFPs will no longer be able to have an accounting policy to imply a time restriction that expires over the useful life of these assets.  Additionally, NFPs will need to record the release of restriction when the property is placed in service.

Impact in the Year of Implementation

For NFPs that currently follow the second option, there will be no impact from the implementation of ASU 2016-14.

For NFPs that currently follow the first option, there will be an impact in the year they implement ASU 2016-14.  In the first year a NFP implements ASU 2016-14, the NFP will need to reclassify any balance in restricted net assets that relates to these implied time restrictions to net assets without donor restrictions.  The reclassification should be to the opening balances of net assets in the year of implementation.  If the NFP presents comparative prior year financial statements in the year of implementation, then those prior year financial statements will also need to be likewise adjusted.

For NFPs that currently follow the third option, there may be an impact in the year they implement ASU 2016-14.  NFPs that currently follow the third option record the release of restriction on donor-funded capital projects as the funds are spent.  Under the new requirements of ASU 2016-14, these NFPs will need to change to record the release of restriction when the project is placed in service.  If a NFP has no donor-funded capital projects in process in the first year the NFP implements ASU 2016-14, then there will be no impact from implementation.  However, if the NFP has a donor-funded capital project in process, the NFP will need to reclassify any balances in unrestricted net assets that relate to released restrictions back to net assets with donor restrictions.  The NFP would then wait and release the entire balance of restricted net assets for the capital project when the project is placed in service.  If the NFP presents comparative prior year financial statements in the year of implementation, then those prior year financial statements will also need to be likewise adjusted.

Want to Learn More?

This article focuses on one of the key changes required by ASU 2016-14.  In future articles we will discuss other key changes in more detail along with practical guidance on implementation issues.  In the meantime, please contact your Clark Nuber service team or Andrew Prather if you would like to discuss how these changes will impact your NFPs financial statements.

© Clark Nuber PS and Developing News, 2016. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Clark Nuber PS and Developing News with appropriate and specific direction to the original content.

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