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 third in a series discussing the changes required by ASU 2016-14. In this article, we discuss a new requirement to disclose board designations of net assets.
What is Changing?
The FASB noted that one of its goals with this ASU is to improve information about the various internal and external limitations and restrictions on the resources of NFPs. To accomplish that goal, in part, the FASB has added a new requirement that all NFPs provide disclosures about the amounts and purposes of governing board designations, appropriations, and similar actions that result in self-imposed limits on the use of resources.
Practically speaking, this means disclosing board designations (and similar self-imposed limits) on net assets without donor restrictions as of the balance sheet date. This can be accomplished by using subtotals on the face of the balance sheet or in a footnote, such as the following example:
Alternatively, the disclosure requirement can be met in a narrative format in a footnote, such as the following example:
What are “Board Designations”?
The FASB provides a definition that helps us understand what should be considered a “board designation” on the net assets of an NFP:
Board-Designated Net Assets: Net assets without donor restrictions subject to self-imposed limits by action of the governing board. Board-designated net assets may be earmarked for future programs, investment, contingencies, purchase or construction of fixed assets, or other uses. Some governing boards may delegate designation decisions to internal management. Such designations are considered to be included in board-designated net assets.
Here are some key points from this definition:
- Board designations are internal limits imposed by action of the governing board of the NFP. Board designations are not limits placed on resources by external parties such as lenders, although a board could choose to use such external limits as a basis for their designation. Board designations are also not limits placed on resources by donors, which are disclosed separately as a component of net assets with donor restrictions.
- Board designations can be for a broad range of topics. Common examples are operating reserves, quasi-endowments, and capital reserves.
- Board designations can be made by management if the duty is assigned to management by the board.
- Board designations do not exist at some NFPs. The requirement from FASB is to disclose such designations if they exist; however, there is no requirement from the FASB for all NFPs to create designations. Accordingly, those NFPs with no board designations would have nothing to disclose.
What Do I Do Now?
This new disclosure requirement creates a need for NFPs to have policies and/or practices regarding board-designations on net assets, even if the NFP has no designations. We recommend NFPs consider the following actions to prepare for this new requirement in ASU 2016-14:
- If your NFP has no board designations, then document that fact as evidence for your auditor.
- If your NFP has board designations, then ensure your NFP has a written policy and procedures regarding board designations on resources.
- The policy should specify if the board has delegated this responsibility to management.
- Review existing board designations, if any, and take action on any that are out of date.
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 NFP’s financial statements.
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