Nonprofit Financial Statement Overhaul

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1 Presenter Nonprofit Financial Statement Overhaul ASU Trent Foster Weaver Partner, Higher Education Largest overhaul of NFP financial statements in over 20 years. Proposal includes no changes to measurement and only impacts disclosures and presentation. All three financial statements received an overhaul. The proposed amendments would change several of the requirements for financial statements. Net asset classification Liquidity information Statement of cash flows presentation Statement of activities presentation 3 4 Certain amendments would add new requirements or replace existing requirements, and others would remove existing requirements or provide greater flexibility in complying with the requirements. The ASU was issued in April 2015 and is over 250 pages. Comment period ended on Aug 20, Received over 250 letters

2 Better serve the needs of financial statement users. FASB is looking to create clarity and uniformity in reporting across the financial statements of various NFPs and make them more comparable. Provide donors and lenders with liquidity information so they could better assess the financial health of the NFPs they are interested in supporting. 7 8 Under the current financial reporting model, notfor-profit financial statements present net assets in three categories: 1. Unrestricted net assets 2. Temporarily restricted net assets 3. Permanently restricted net assets 10 Issues: The line between temporarily and permanently restricted net assets has become blurred. UPMIFA permits not-for-profit organizations to spend from the corpus of donor-restricted endowments. Nonprofits will be required to: o Present on the face of the statement of financial position amounts for two classes of net assets. Net assets with donor restrictions Net assets without donor restrictions Rather than for the currently required three classes

3 Underwater Endowment Funds The ASU continues to require footnote disclosures that elaborate on the nature and amounts of donor-imposed restrictions on net assets. It also requires similar disclosures about designations of net assets by the organization s governing board, which can also significantly impact operations. Issue: Accounting for underwater endowments is confusing to the users of the financial statements. o Currently, the amount required to be retained permanently is presented as permanently restricted net assets, and the shortfall of the fair market value below this amount is presented as a reduction of unrestricted net assets Underwater Endowment Funds Underwater Endowment Funds The amount of endowment funds that are underwater would be reported within the proposed with donor restrictions class of net assets (rather than within the unrestricted class of net assets as currently required). New/additional footnote disclosures. o In addition to disclosing the currently required aggregate amount by which funds are underwater, an NFP also would be required to provide additional disclosures about the original gift amount, current fair value and organizational spending policies : Assets Placed-in-service : Assets Placed-in-service Issue: Currently organizations have the option to release net assets over the useful life of the acquired asset. Change to one consistent method. o New requirement to use the placed-in-service approach to report expired restrictions on gifts of cash and other assets used to acquire or construct a longlived asset. o In other words, once the long-lived asset is in service, the net assets associated with the restricted gifts are released to net assets without donor restrictions

4 Changes to the Statement of Functional Expenses Changes to the Statement of Functional Expenses All NFPs would be required to report expenses by both their nature and function. Currently, only voluntary health and welfare organizations have such a requirement. The proposal would allow flexibility to present expenses by function and by nature on the face of the statement of activities, as a separate statement, or within the notes. 20 Changes to the Statement of Functional Expenses New and more detailed footnote disclosures are going to be required to disclose in detail the methodologies that the organization uses to allocate its costs between program services and supporting services. 21 Issue: To some readers of the financial statements, the statement of cash flows remains a mystery. The ASU would require that the direct method of reporting cash flows be used rather than the more common indirect method. o The direct method cash flow presents a clearer picture to the average reader of cash inflows and outflows to and from the organization

5 Additionally, the ASU is proposing changes in classification of certain types of transactions in the cash flow specifically related to: o Purchases of long-lived assets o Payments of interest on borrowings New Liquidity Disclosures 25 New Liquidity Disclosures New disclosures related to the quantitative and qualitative liquidity amounts. Organizations will need to disclose: o The amount of financial assets that, because of restrictions or limitations on their use, are not available to meet nearterm cash needs. o The amount of financial liabilities that require cash in the near term. o The way an organization manages liquidity, including the time horizon being used. Changes to the Statement of Activities 27 Changes to the Statement of Activities Present on the face of the statement of activities the amount of the change in each of the two classes of net assets rather than that of the currently required three classes. Items Not Discussed in Detail 29 5

6 Changes to the Statement of Activities Intermediate Measure of Operations o Present on the face of the statement of activities two additional amounts (subtotals) of the operating activities that are associated with changes in net assets without donor restrictions. 31 FASB TO HOLD ROUNDTABLE o Monday, September 21, 2015 FASB Offices o Tuesday, October 6, 2015 University of Southern California o tupdatepage&cid= ?mc_cid=036f7d82 fb&mc_eid=aaef64ad01 The proposed amendments would be applied on a retrospective basis. The effective date, and whether it should be the same for all not-for-profit entities, as well as whether early adoption would be permitted, will be determined by the FASB after considering stakeholders feedback on this proposal The above outlined changes are a brief summary of some of the major changes proposed in the ASU. Many organizations and professional societies have commented on the exposure draft. There will likely be a number of revisions before a final ASU is issued. Weaver is monitoring the rollout and implementation. Should you have any questions or concerns regarding the Proposed Accounting Standards Update, Not-for-Profit Entities (Topic 958) or any other questions regarding your Not-for-Profit organization, please feel free to contact Trent Foster, CPA, Partner, at trent.foster@weaver.com November Nonprofit CPE event o 4 hour event o More details about the changes coming your way o Real examples of financial statements and footnote disclosures under the new proposed standards. o Other nonprofit hot topic issues Stay tuned for more info on this great event!