Sea Changes: Breaking Down FASB Regulations for Nonprofits.

• Author: Kowalczyk, Stacie

In late June 2016, the FASB issued accounting guidance containing the most sweeping changes to nonprofit financial reporting since the early 1990s. Practically speaking, the new standard will dramatically impact the financial reporting seen by your donors, grantors, creditors, boards and management. These much-anticipated updates are specifically designed to make improvements that address many identified issues about current nonprofit financial reporting, including net asset classification, liquidity, financial performance and cash flow, and will address the following:

* Complexities about the three classes of net assets that focus on the absence or presence of donor-imposed restrictions and whether those restrictions are temporary or permanent.

* Deficiencies in the transparency and utility of information useful in assessing an organization's liquidity caused by potential misunderstandings and confusion on how restrictions or limits imposed by donors, grantors, laws, contracts and governing boards affect an entity's liquidity and financial performance.

* Inconsistencies in the type of information provided about both natural and functional expenses of the period.

* Hesitation to use the direct method of presenting operating cash flows because of the requirement to prepare the indirect method reconciliation.

Net Asset Classification:

Financial Statement Presentation Nonprofit financial statements have traditionally presented net assets in three categories or classes: unrestricted, temporarily restricted and permanently restricted. Under the new accounting standard, net assets will simply be categorized either as "with donor restrictions" or "without donor restrictions." This streamlining is intended to reduce complexity and make the information more understandable to donors and internal users.

To meet the presentation requirements, a nonprofit organization can choose to show a condensed presentation in the net assets section of the Statement of Financial Position. For an example of a disaggrcgrated net assets presentation, sec Example 1 at armanmo.co/CalCPA-FASB-Exl.

Alternately, a nonprofit could choose to show additional levels of disaggregation within the two net asset categories in the Statement of Financial Position (see Example 2 at armanino.co/CalCPA-FASB-Ex2).

Nonprofit organizations will ultimately choose which degree of detail is appropriate to their organization's complexity and internal financial reporting needs, as well as considering external users. Nonprofit organizations should be aware that additional disclosures surrounding net assets will be required in the footnotes regardless of the level of detail on the face of the Statement of Financial Position.

Underwater Endowments

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 standard, the underwater portion will be classified as "net assets with donor restrictions." Keep in mind that this change may cause a restatement or reclassification of beginning net assets upon adoption that should be treated as a change in accounting principle.

Similar to the presentation on the Statement of Financial Position, a nonprofit organization will show revenues and expenses on the Statement of Activities as either with or without donor restrictions. For an example of the Statement of Activities showing revenue and expenses as either with or without donor restrictions, visit arrnanino.co/CalCPSA-FASB-Ex3.

Most nonprofit organizations maintain their net assets in their general ledger and subsidiary ledgers under the current model, which is unrestricted, temporarily restricted and permanently restricted net assets. At this point, there is no need to change that practice. If a nonprofit has any beginning of the period restatements due to the adoption of the standard, those reclassifications should be made, otherwise, the recommendation is that nonprofits keep their internal chart of accounts structure consistent.

A nonprofit organization will still have fiduciary responsibility over those net assets, so it is a good idea to keep them separated internally.

The example Statement of Activities in Example 3 is referred to as a multi-column statement, which can have more utility for comparative presentation purposes. Nonprofit organizations also can choose to show a single column presentation on their Statement of Activities, which is seen often in the health care industry. Nonprofit organizations can also have a multiple statement presentation where they show a Statement of Revenues, Expenses and Other Changes in Net Assets without Donor Restrictions and a Statement of Changes in Net Assets. The new standard provides examples of both formats.

Net Asset Classification: Disclosures

Disclosure recjuirements in current GAAP--including information about the nature and amounts of donor-imposed restrictions, such as time, purpose and perpetuity--are still required under the new standard.

Figure 1 is an example of disclosure of time, purpose and perpetuity restrictions on net assets with donor restrictions: Ouasi-endowments are funds earmarked by the board rather than by donors to act like permanently restricted funds from which income is available lor general operations (e.g., a "rainy day fund") or certain specific purposes. Accordingly, these funds will be reported as "without donor restrictions."

figure 1 Note B Net assets with donor restrictions Subject to expenditure for specified purpose: Capital purchases or improvements $ 1,500,000 Purpose A 750,000 Purpose B 500,000 Purpose C 250,000 3,000,000...