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 second in a series discussing the changes required by ASU 2016-14. In this article, we discuss changes to net asset classification.
What is Changing?
For the past 20 years, U.S. GAAP has required NFPs to report net asset balances, and the related changes to those balances, in three classes based on the presence or absence of donor restrictions. The titles for those three classes were: unrestricted, temporarily restricted, and permanently restricted.
ASU 2016-14 will now require NFPs to use two classes titled “net assets with donor restrictions” and “net assets without donor restrictions”.
The FASB has indicated that there are two primary reasons for making this change. The first reason is confusion over the titles currently used for the net asset classes. The FASB found in its research that using the term “unrestricted” causes confusion with some readers of NFP financial statements. Many readers incorrectly interpret the term to mean a lack of any form of external or internal restriction, when instead it is only meant to refer specifically to donor restrictions.
The second reason is due to changes in state laws regarding the management of endowment funds that have blurred the line between “temporary” and “permanent” donor restrictions. As a result, distinguishing between these two classes of donor restricted net assets has become less meaningful for NFP financial reporting. In response to these issues, the FASB decided to condense the net asset classes to two and relabel them to more clearly communicate that the classes are based only on donor restrictions. Additionally, by dropping the requirement to report the balances of temporarily and permanently restricted net assets, the FASB allows NFPs to disaggregate the main classification of net assets with donor restrictions into subtotals that should put the focus on information that is more meaningful to the NFP.
ASU 2016-14 uses the phrases “net assets with donor restrictions” and “net assets without donor restrictions” as the titles for the two new net asset classes. These specific phrases are not required to be used as the titles and alternative phrases may be used, as long as those alternative phrases effectively communicate the same meaning and the NFP reports balances of the two classes of net assets.
Impact to the Statement of Financial Position
Practically speaking, this required change will primarily be a grouping and labeling change for the statement of financial position (SFP). More specifically, the current classes of “temporarily restricted” and “permanently restricted” will be merged into a new single class labeled “net assets with donor restrictions” and the current class of “unrestricted” will simply be relabeled as “net assets without donor restrictions.”
NFPs will be required to present balances for net assets with donor restrictions, net assets without donor restrictions and total net assets on the SFP. Similar to current disclosure requirements, NFPs will also be required to present information about the nature and amounts of the types of donor restrictions on net assets. This can be accomplished by disaggregating and providing subtotals on the face of the SFP for net assets with donor restrictions or by providing a footnote that discloses that information.
Impact to the Statement of Activities
Like the SFP, the required change will also primarily be a grouping and labeling change for the statement of activities (SoA). NFPs will be required to present the changes in net assets for net assets with donor restrictions, net assets without donor restrictions and total net assets. Similar to current practice, NFPs may further disaggregate the information for the changes in the two main classifications into more meaningful subtotals. For example, a NFP with a donor-restricted endowment fund and contributions restricted for various program activities may choose to disaggregate and present the respective activity for those two categories on the SoA.
What Do I Do Now?
NFPs will need to continue to track the different categories of donor restrictions on contributions and other resources in the same manner they have in the past. This will be necessary to support the requirement to disclose the nature and amounts of the different types of donor restrictions on net assets. If your NFP currently has a good process for tracking donor restrictions on net assets, then likely you may continue to use the same system going forward and will just need to go through the grouping and labeling change when you implement ASU 2016-14.
Want to Learn More?
This article focus 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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