Innovate 2017 Takeaways: The Effect of ASU 2016-14 on Nonprofit Finance Reporting
John Alfonso shared his extensive knowledge of the upcoming Accounting Standards Update (ASU) in what was one of the most informative and actionable sessions at Innovate this year. In his extremely detailed presentation, he outlined everything nonprofits need to know about the future reporting requirements. Though this post will provide a high-level overview of the material John covered, I encourage you to download his full presentation here so you don’t miss a single detail. This information is vital for nonprofit financial managers.
Who is CohnReznick?
CohnReznick is a national professional services firm headquartered in New York, NY. Offering accounting, tax and advisory service, it is one of the largest public accounting firms in the United States. They are a member of Nexia International, a global network of independent consulting and accounting firms.
Who is John Alfonso?
John Alfonso is an accomplished CPA with over 30 years of experience providing audit, accounting, and consulting services to not-for-profit organizations. He works extensively with associations, community development corporations, educational institutions, private foundations, religious organizations, governmental entities, and social service agencies.
John is the New York office lead of CohnReznick’s Not-for-Profit and Education Industry Practice. He also serves as treasurer of the board for the American Cancer Society, where he’s volunteered for several years.
What does CohnReznick do?
CohnReznick provides accounting, tax and advisory services to a wide variety of industries including commercial real estate, construction, entertainment, healthcare, medical, technology and law firms. They help companies manage everything from employee benefit plans and outsourced accounting, to strategic tax planning, cybersecurity services and much more.
What did the presentation cover?
John’s presentation provided a background for what happened leading up to the new Accounting Standards Update (ASU). He then highlighted significant changes to current practice, described the qualitative and quantitative requirements of the new ASU, acknowledged the update’s impact on stakeholders and explained what organizations should do to prepare for the changes.
On August 18, 2016, the FASB issued ASU 2016-14, Presentation of Financial Statements of Not-for-Profit Entities. This new guidance is the first major set of changes to nonprofit financial statement reporting standards since the issuance of FASB 117 in 1993, which established the current guidance. While the FASB believes that the existing standards are still sound, stakeholders felt the standards could be improved to provide better information to donors, grantors, creditors, and other users of financial statements.
The FASB’s Not for Profit Advisory Committee (NAC) was established in 2009 with a mission to ensure that the not-for-profit sector’s concerns are communicated to the FASB. The NAC consists of 18 members in the not-for-profit sector and includes preparers, auditors and users of financial statements. In 2011, the FASB added the not-for-profit Financial Reporting project to its agenda as a result of recommendations from the NAC.
In April 2015, the FASB issued the Exposure Draft for public comment. The FASB received approximately 260 comment letters from preparers, users, auditors, academics and others. The FASB also held public roundtables, workshops and other outreach meetings. Based on the feedback, the FASB then decided to split the project into 2 phases.
Phase 1 – Changes that had broad support, did not depend on other projects and were improvements that the FASB could make quickly. Phase 1 culminated in this ASU.
Phase 2 – The FASB deferred its more controversial proposals which included requiring the same defined measure of operations for all nonprofits to Phase 2. The FASB has not said when it will complete Phase 2.
Significant Changes to Current Practice
The new standard revises the net asset classification to two classes instead of the previous three:
- With donor restrictions
- Without donor restrictions
The ASU will enhance disclosures for self-imposed limits on the use of resources without donor-imposed restrictions (designated net assets) and the composition of net assets with donor restrictions.
Underwater Endowment Funds
The new standard also updates the accounting and disclosure requirements for underwater endowment funds. These are donor-restricted endowment funds for which the fair value of the fund at the reporting date is less than either the original gift amount or the amount required to be maintained by the donor or by law.
Under the new standard, if a donor-restricted endowment fund is an underwater endowment fund, the accumulated losses will be included together with that fund in net assets with donor restrictions.
Reporting of Investment Returns
Organizations will now be required to give a net presentation of investment expenses against investment return, but will no longer need to disclose investment expenses.
Qualitative and Quantitative Requirements
All nonprofits must now present expenses by nature as well as function. This information must be shown in one location — either all in the notes, or all on the face of financial statements. They will need to be able to qualitatively disclose how they are managing their available liquid resources and quantitatively communicate the availability of financial assets to meet cash needs for general expenditures within one year of the balance sheet date.
The Board concluded that information about the availability of a nonprofit’s financial assets and management of its liquid resources is useful to creditors, donors, grantors, and others that are interested in assessing a nonprofit’s liquidity and financial flexibility.
These disclosures may be the most difficult for nonprofits to implement. CohnReznick encourages Nonprofits to start educating their stakeholders (bankers, donors, board members, etc.) about these changes so that they can be included in the implementation process.
Cash Flow Statements
The new standard will allow for a choice between the direct and indirect method of reporting operating cash flows. The indirect reconciliation will no longer be required when using the Direct Method.
The Exposure Draft had initially proposed requiring all nonprofits to use the direct method. However, in the comment letters received, many questioned requiring this of nonprofits, while allowing business entities to continue to have flexibility.
The change in classification comes from an effort to reduce complexity. The distinction between permanent and temporary restrictions has been blurred due to changes in state laws and the widespread adoption of the Uniform Prudent Management of Institutional Funds Act of 2006 (‘UPMIFA”).
Keep in Mind:
- Donor stipulations will be the only factor in determining how net assets are classified.
- Although net assets may have no donor restrictions, there may still be other restrictions that must be disclosed (e.g. board designated).
CohnReznick says it’s important not to lose track of restrictions in your general ledger even though there will be a reduction in the net asset classifications on your balance sheet.
When does the ASU take effect?
This ASU is effective for annual financial statements issued for fiscal years beginning after December 15, 2017, and for interim periods within fiscal years beginning after December 15, 2018.
Application to interim financial statements is permitted but not required in the initial year of application. Early application of the amendments is permitted. The amendments should be initially adopted only for an annual fiscal period or for the first interim period within the fiscal year of adoption.
What You Can do to Prepare
Alfonso had some excellent tips on what financial teams can do to be prepared for the coming changes:
- Read the “Summary” at the beginning of the ASU and the “Basis for Conclusions” at the back of the ASU (About 30 pages in total).
- Change the general ledger grouping codes so you can report two classes of net assets instead of three.
- Re-evaluate your functional expense allocations to ensure that they are consistent with the new guidance for management and general expenses in the ASU
- Discuss liquidity disclosures with your Board and management team
- Prepare a pro-forma financial statement
In order to stay current, make sure you:
- Sign up for electronic alerts from the FASB
- Listen to webcasts from the FASB
- Review sample financial statements on the AICPA website
- Review financial statements of other large not-for-profit organizations that early adopt
We’d like to thank John Alfonso for joining us at Innovate this year. There was a lot of information to cover, and he did a great job of clearly describing the updates and making things easy to understand. Again, if you would like to make sure your organization is adequately prepared for the ASU, you can download John’s full presentation here.