Accounting Standards Update (ASU) Summary of Changes

Transcription

1 WE BUILD STRONGER NONPROFITS ONE ACCOUNTING DEPARTMENT AT A TIME Accounting Standards Update (ASU) Summary of Changes Introduction Accounting Standards Update (ASU) , Presentation of Financial Statements of Not-for-Profit Entities, represents the first major change to not-for-profit financial reporting in over 25 years! Are you ready? By issuing this guidance, the Financial Accounting Standards Board (FASB) hopes to provide financial statement users with statements that are clearer and more transparent, and provide increased consistency of information. At Your Part-Time Controller, LLC (YPTC), we feel the guidance contains two major groups of changes: 1) changes in financial statement presentation, and 2) enhanced note disclosures (additions to the footnotes that accompany the financial statements). There are a few minor changes, which we ll review at the end. To assist with the implementation of these changes, YPTC has provided an Implementation Checklist at the end of this summary. Effective Dates Annual statements: Fiscal years beginning after December 15, This means January 1, 2018 for entities with a calendar year-end. Interim Statements: Within fiscal years beginning after December 15, 2018 Early adoption is permitted Financial statement presentation Classification of net assets Net assets represent a not-for-profit entity s excess or deficiency of assets over liabilities. Under the new guidance, NFPs are required to classify and report net assets in two groups instead of three. Current Net Assets Classes New Net Assets Classes Unrestricted Net Assets Without Donor Restrictions Temporarily Restricted Net Assets Permanently Restricted Net Assets With Donor Restrictions Net assets without donor restrictions represent the part of net assets that are available for general use and are not subject to donor-imposed restrictions. Included in net assets without donor restrictions are board-designated net assets (described in the board-designated net assets section below).

2 Net assets with donor restrictions represent net assets subject to donor-imposed restrictions. Donorimposed restrictions may be temporary (purpose or time-restricted) or permanent in nature. Classification of net assets on the statement of financial position (balance sheet) Entities will report amounts for net assets without donor restrictions and net assets with donor restrictions, and continue to provide the amount for total net assets. The two net asset classes are the minimum reporting that is required. Entities may choose to further disaggregate within each net asset class. If an entity chooses to provide further disaggregation, amounts for each of the two net asset classes and the total net assets must still be reported. There are additional disclosures required for donor restrictions and board designations, as discussed in the enhanced note disclosures section below. Classification of net assets on the statement of activities Entities will report the amount of the change in each of the two (new) classes of net assets rather than the current three classes of net assets. Statement of cash flows Entities still have the freedom to prepare the statement of cash flows using either the direct method or the indirect method of reporting cash flow from operating activities. And, under the new guidance, presentation of the indirect reconciliation is no longer required when using the direct method. Expenses by nature and function The new guidance requires that all not-for-profit entities prepare an analysis of expenses by function and nature. Previously this analysis (in the form of a statement of functional expenses) was required only for voluntary health and welfare organizations. The analysis should provide the relationship between functional classification and natural classification for all expenses. Functional classification includes a disaggregation of expenses by an entity s major classes of program services and supporting activities (management and general, fundraising, and membership development). Examples of natural expense classifications include salaries and wages, employee benefits, professional services, supplies, interest expense, rent, utilities, and depreciation. The analysis of expenses must be provided in one location in the financial statements, which can be on the face of the statement of activities, a schedule in the notes, or as a separate statement. The analysis cannot be presented as supplemental information. Additional disclosures about the methods used to allocate expenses between program and support functions are also required (discussed under the cost allocation methods section below). FASB advises that expenses that are reported within other line items on the statement of activities for example meals, entertainment, or facility rental costs of special events reported as direct donor benefits - should be included in the expense analysis. However, external and direct internal investment expenses that have been netted against investment return should not (see the investments section below). YPTC expects most organizations will choose to provide the expense analysis through a statement of functional expense. Because the analysis is now a requirement, it cannot be prepared by an entity s auditors. When preparing the schedule, entities should be very careful to list expenses by natural classification and refrain from using account groupings that only they understand; if account groupings are used, entities should provide notes to explain what s in them. YOUR PART-TIME CONTROLLER, LLC HELLO@YPTC.COM PAGE 2 OF 5

3 Enhanced note disclosures YPTC note: not only are there quite a few new note disclosures, but the disclosures involve analysis and communication by not-for-profit entities about their policies and procedures surrounding liquidity and cash management, board designations, and endowment spending. This means entities will need to have these policies and procedures in place in order to articulate them in the note disclosures. Cost allocation methods ASU requires NFPs to disclose the methods used to allocate expenses between program and support functions. FASB advises that salaries and benefit costs of staff performing activities such as oversight, business management, recordkeeping and payroll, budgeting, and grant reporting represent supporting functions and should be reported as management and general activities. FASB also advises that the salaries and benefit costs of staff who directly conduct or supervise program activities should be allocated among those functions. At YPTC, we feel this note disclosure will not only increase transparency and comparability, but encourage entities to undergo a more thorough analysis of their cost allocation methodologies. Additionally, documenting cost allocation methodologies will ensure better transfer of information when organizations experience change in accounting staff or leadership. Qualitative and Quantitative information on liquidity and cash availability Disclosures involving liquidity are nothing new; for example, the current guidance requires entities to disclose relevant information about the maturity of assets and liabilities. The new disclosures are intended to provide more useful information about an entity s resources that will help financial statement users assess an entity s liquidity and financial flexibility. The new disclosures may be presented in separate notes or combined into one. Qualitative information NFPs should provide information that communicates how liquid resources are available to meet cash needs for general expenditures within one year of the date of the statement of financial position (balance sheet). Items that might be communicated include: a) an organization s cash-on-hand policy and the number of days operating expenses it strives to maintain, b) how cash in excess of daily requirements is invested, and c) what resources are available for unanticipated needs. At YPTC, we feel this note disclosure will not only assist financial statement users, but provide an historical record of liquidity management policies for an entity s leadership. Quantitative information on cash liquidity The new ASU requires NFPs to disclose the availability of financial assets to meet cash needs for general expenditures within one year of the date of the statement of financial position (balance sheet). Financial assets include liquid assets such as cash, receivables, debt securities, and equity securities; but not fixed assets, prepaid expenses, or inventory. When determining the availability of financial assets, an organization should consider the nature of the asset as well as internal or external limits. These might be internal limits due to board designations or external limitations such as cash held on deposit as a compensating balance, YOUR PART-TIME CONTROLLER, LLC HELLO@YPTC.COM PAGE 3 OF 5

4 cash restricted by donors for future periods, or cash restricted by contractual limitations (such as a loan covenant). Cash inflows, such as distributions from endowments that will be available for general use, should also be considered in the calculations. YPTC note: expect to see a lot of variability in the quantitative disclosure, as entities have the freedom to include or exclude amounts based on their financial story. Thus, NFPs should use this opportunity to provide explanatory information for amounts that are included or excluded from the financial assets calculation. The presentation of a classified balance sheet - grouping assets and liabilities into current and non-current amounts can help in the disclosure preparation. Board-designated net assets Under the new guidance, NFPs should disclose information about the amounts, purposes and types of any board designations. Board-designated net assets are net assets without donor restrictions subject to self-imposed limits by actions of an entity s governing board. These disclosures can be provided on the face of the financial statement or in the financial statement notes. If provided on the face of the statement, they should be reported in the without donor restrictions category of net assets on the statement of financial position (balance sheet). Composition of net assets with donor restrictions Disclosures about donor restrictions are not new, but the standards update requires enhanced disclosures about the composition of net assets with donor restrictions and more importantly, how the donor restrictions affect the use of resources. Information about the nature and amounts of the different types of donor-imposed restrictions should be provided. The disclosures should include how the restrictions affect the use of the net assets; for example if the restrictions are temporary or permanent in nature. The information may be reported on the face of the statement of financial position or in the financial statement notes. Underwater endowment funds In addition to (current) endowment disclosures, the new guidance requires several new disclosures on donor-restricted underwater endowment funds. An endowment is underwater when its fair value 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). In the enhanced disclosures, an NFP should report aggregate amounts for the fair value, original gift amounts, and the underwater amounts for donor-restricted underwater funds. FASB has also clarified that underwater amounts should be classified as part of net assets with donor restrictions. Additional recommended disclosures are a description of an entity s endowment spending policy, any appropriation actions taken from underwater funds (during the period), as well as the governing board s interpretation of its ability to spend from underwater endowment funds. In other words, FASB wants entities to report on whether they are following their own policies! Operating measures Not-for-profit entities have always had the option to incorporate additional classifications within the statement of activities. For example, an entity may choose to present the excess or deficit of operating revenues over expenses and report nonoperating items such as those from a capital campaign in a separate section on the statement of activities. Under the new guidance, if an entity choses to incorporate additional classifications, it must provide (at a minimum) the change in net assets without donor restrictions for the period. Additionally, if use of the term operations is not apparent from the financial statements, an entity should provide YOUR PART-TIME CONTROLLER, LLC HELLO@YPTC.COM PAGE 4 OF 5

5 disclosures that describe the nature of the reported measure, items that are included or excluded, and (if applicable) descriptions of board designations, appropriations, or other internal transfers. Other Changes Investments The new guidance requires investment return be presented net of related external and direct internal investment expenses. This change is intended to make investment return comparable across different entities. The new presentation of investment return also requires expenses to be included in the net asset categories in which the investments are reported. Disclosure of the netted expenses is no longer required. YPTC note: as mentioned previously, external and direct internal investment expenses that are netted against investment return should not be included in the analysis of expenses. Long-lived (fixed) assets The current guidance allows for two options for reporting expirations of restrictions on gifts of cash or other assets to be used to acquire or construct long-lived assets: a) release donor-imposed restrictions over the estimated useful lives of the acquired assets, or b) release donor-imposed restrictions as the acquired assets are placed in service. Under the new guidance, the placed-in-service approach will be the only allowed approach for reporting expirations of restrictions on gifts of cash or other assets used to acquire or construct long-lived assets. YPTC note: if an entity uses the eliminated (useful lives) approach, it will have to make a policy change! In addition, entities will have to reclassify any amounts from net assets with donor restrictions to net assets without donor restrictions for any long-lived assets placed into service as of the beginning of the adoption period. Implementation Retrospective basis The changes in this ASU should be applied on a retrospective basis, which means that all financial statements presented must reflect the changes, and the effect(s) of the changes on net assets must be disclosed for each period presented. If an entity chooses to present comparative financial statements in the year of adoption it has the option to omit a) the analysis of expenses and b) the disclosures on qualitative and quantitative information on liquidity and cash availability for any periods presented before the period of adoption. Implementation Plan To assist in the implementation of ASU , YPTC has prepared the following Implementation Checklist. Note that in order to capture some of the financial statement changes, entities will need to make slight revisions to their chart(s) of accounts. Before implementing, entities should review changes with their accounting and auditing professionals. YOUR PART-TIME CONTROLLER, LLC HELLO@YPTC.COM PAGE 5 OF 5

6 WE BUILD STRONGER NONPROFITS ONE ACCOUNTING DEPARTMENT AT A TIME ASU Are You Ready? IMPLEMENTATION CHECKLIST Review or create policies for: Adoption: Cost allocation methodologies How are costs allocated among program and support functions? Which expenses are based on actual costs and which are allocated? How are salaries of supporting staff allocated? Liquidity management What level of financial assets does your organization strive to maintain for daily requirements? What is the policy for how cash in excess of daily requirements is handled? What resources are available for unanticipated needs? Board-designated funds (aka quasi-endowment ) spending Does your organization have a policy for the commitment of board-designated funds? Does the board periodically review a report of disbursements? Endowment spending (specifically, in regard to underwater endowments) What is your board s interpretation of its ability to allow spending from donor-restricted endowment funds if amounts fall below original gift amounts? How are appropriation amounts determined? Has your organization followed its own endowment spending policy? Approach for reporting expirations on gifts of capital assets Does your organization use the placed-in-service approach? If not, your organization will have to adopt it talk to your auditors Prepare schedules and drafts for the new footnote disclosures (as applicable) Expense analysis with disclosure of cost allocation methods Qualitative and quantitative information on liquidity and cash availability Board-designated net assets Composition of net assets with donor restrictions Underwater endowment funds Operating measures With auditors, decide whether to present comparative statements in the year of adoption Financial report changes: Revise report columns to reflect new net asset classes Consider whether it would be helpful to prepare a classified Statement of Financial Position