Welcome back to Keiter’s series on ASU 2016-14, Not-for-Profit Entities (Topic 958), Presentation of Financial Statements of Not-for-Profit Entities. This article is Part II of our discussion on the changes to net asset classifications.
Changes to Net Asset Classifications
A new FASB ASC Master Glossary definition has been created for board-designated net assets:
Additionally, the new standard introduces new disclosure requirements of quantitative and qualitative information for board designations on net assets. The disclosures can be made in tabular format on the face of the Statement of Financial Position or through text disclosure as part of the notes. The key is to disclose the purpose of any board-designated net assets, such as a quasi-endowment or an operating reserve, and the expected timing of use if it is not inherently clear from the purpose. Given the emphasis over this area, most entities will need to update their internal policies and practices regarding board-designated net assets, even if there currently aren’t any designations. Below is a sample text disclosure in the notes to the financial statements:
ASU 2016-14 also changes the disclosures related to the donations of, or contributions restricted for the purchase of, property and equipment. The new standard removes the option allowing an entity which received such a donation or contribution to imply a time restriction for property and equipment, unless there are explicit donor stipulations. Also, entities are no longer allowed the option to release the donor-imposed restriction over the estimated useful life of the asset. Instead, the standard requires the use of the placed-in-service approach, meaning the entity will report the release of restrictions when the asset is placed into service. In the year of adoption of ASU 2016-14, an entity will need to reclassify amounts from net assets with donor restrictions to net assets without donor restrictions for any long-lived assets that have been placed in service as of the beginning of the period of adoption.
The last key change for net assets classes under the new standard is reporting for underwater endowments. The new FASB ASC Master Glossary definition for underwater endowment reporting is:
The major change in this area is that the underwater portion is no longer reclassified as unrestricted, or after ASU 2016-14 implementation, “without donor restriction”. Instead the entire balance of the endowment fund, including the underwater portion, is included within “net assets with donor restrictions”. An entity will be required to disclose its interpretation of the entity’s ability to spend from underwater endowment funds along with its policy and any actions taken during the period concerning appropriation from underwater endowment funds. For each period a Statement of Financial Position is presented, an entity must disclose each of the following, in the aggregate, for all underwater endowments funds:
- The fair value of the underwater endowment funds
- The original endowment gift amount or level required to be maintained by donor stipulations or by law that extends donor restrictions
- Amount of the deficiencies of the underwater endowment funds (1. Less 2.)
See the following example:
Entity management and the governing body should take time now, before the new standard applies, to review their processes and documentation surrounding board designations, updating them as necessary. Part of the preparation process should be ensuring net asset designations correspond to identifiable assets held by the entity. Also, documentation should be developed for the entity’s interpretation of the ability to spend from underwater endowment funds. The policy should be broad enough to apply to the entire endowed net asset base, while calling out any exceptions that are known amongst the group. The policy should then be reviewed to ensure that a level of prudence has been applied in such a way that long-term implementation will allow for the underwater balances to recover over time.
The next article in this Keiter series on ASU 2016-14 will cover liquidity and availability disclosures…stay tuned!
Changes to Not-For-Profit Financial Statements series:
Additional Not-for-Profit Accounting Resources:
About the Authors
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