In a January 2017 NYN Media article, my colleague Sibi Thomas provided a great overview of the new liquidity disclosure requirements that are part of a significant amendment to the nonprofit accounting standards and explained some key changes that nonprofits, their executives and their financial staff should keep top of mind when preparing financial statements.
Expanding on Sibi’s article, I’d like to explain how the Financial Accounting Standards Board’s recent Accounting Standards Update – its first change to nonprofit financial reporting in over 20 years - helps nonprofits better tell their financial story to donors and grantors. While these revisions, which include presentation changes and additional disclosures, are not required to be implemented until fiscal years beginning after December 15, 2017, some nonprofits may choose to adopt it early.
Nonprofits that are at least partially funded through government contracts face two ongoing challenges. One is finding funding for any associated administrative costs that are not covered by the grant. The second is managing cash flow when governmental agencies are notoriously late in reimbursing nonprofits for expenses they have already incurred. It is common for nonprofits to wait three to six months or more for reimbursement. This can result in serious liquidity issues. Combined, these issues often make it difficult for nonprofits to provide potential private donors a true picture of their financial status.
The Accounting Standards Update disclosure enhancements require that the following information is included:
* Amounts and purposes of governing board designations, appropriations and similar actions that result in self-imposed limits on the use of resources as of the end of the period.
* Composition of net assets with donor restrictions at the end of the period and how the restrictions affect the use of resources.
* Qualitative information that communicates how nonprofits manage the liquid resources available to meet cash needs for general expenditures within one year of the balance sheet date
* Quantitative information, either on the face of the balance sheet or in the notes – and additional qualitative information in the notes where necessary – that communicates the availability of a nonprofit’s financial assets at the balance sheet date to meet cash needs for general expenditures within one year of the balance sheet date.
FASB provided this example disclosure:
|Financial assets, at year-end||$ 234,410|
|Less those unavailable for general expenditures within one year, due to:|
|Contractual or donor-imposed restrictions:|
|* Restricted by donor with time or purpose restrictions||(11,940)|
|* Subject to appropriation and satisfaction of donor restrictions||(174,700)|
|* Investments held in annuity trust||(4,500)|
|* Quasi-endowment fund, primarily for long-term investing||(36,600)|
|* Amounts set aside for liquidity reserve||(1,300)|
|Financial assets available to meet cash needs for
general expenditures within one year:
Currently nonprofit financial statements have no information at all regarding liquidity. The newly required footnote disclosure will clearly indicate a nonprofit’s liquidity position and can be used to show donors and grantors the nonprofit’s need for additional resources. These enhanced disclosures will help improve the usefulness of information provided to donors, grantors, creditors and other users of a nonprofit’s financial statements and hopefully can be used to help secure more unrestricted donations to help fund the nonprofit’s mission.
The other changes that the FASB ASU will require are:
Two asset classes instead of three:
The number of net asset classes have been reduced from three to two by combining temporarily and permanently restricted net assets into one category: Net Assets with Donor Restrictions. Unrestricted Net Assets are renamed Net Assets without Donor Restrictions.
Changes in expense classification:
Another significant change is that all nonprofits will have to categorize their expenses by both functional and natural classifications. Currently, only voluntary health and welfare organizations have to do this. Functional expenses include program, management and general, and fundraising costs. Natural expenses include salaries and wages, employee benefits, supplies, rent, and utilities.
In addition, an analysis of expenses by both functional and natural classification will have to be shown in one location, such as in a statement of functional expenses, on the face of the statement of activities or in the footnotes to the financial statements. The analysis cannot be presented across footnotes or in supplemental schedules.
Other expense-related changes:
* You must now disclose how costs are allocated between program and support services. An example of this can include wording such as: “The cost of providing various programs and activities has been summarized in the statement of functional expenses. Costs that can be attributable to a specific function are charged to that function. Other costs are allocated using estimated personnel hours and/or square footage.
* For underwater endowment funds, the difference between the original gift amount – or level required by law – and the fair value of the fund must be disclosed.
* External and direct internal investment expenses no longer need to be disclosed, though investment return, net of these expenses, must be reported.
* In the absence of donor restrictions, nonprofits will have to use the “placed-in-service” approach for buildings or other long lived assets and record them as an unrestricted gift. Prior to this update, a time restriction could be implied and the asset recorded as temporarily restricted and released to unrestricted over the asset’s useful life. Organizations that did imply a time restriction in the past will now have to fully release the remaining temporarily restricted net assets to unrestricted when the update is implemented.
Early adoption of the changes required by ASU 2016-14 is permitted and even encouraged. Hopefully this information will help you prepare.
John D’Amico, CPA, is a director with the Professional Standards Group at Marks Paneth LLP and provides quality control services to the firm’s Nonprofit, Government and Healthcare Group. D’Amico specializes in quality reviews of nonprofit organizations’ audits. He can be reached at firstname.lastname@example.org.