The Financial Accounting Standards Board’s new Accounting Standards Update (ASU) 2016-14 requires changes for all not-for-profits (NFP) to their financial reporting model to improve financial statement disclosures—which will ultimately affect how financial statements are used to make decisions to lend, donate or grant resources. Adopting the new NFP reporting standard may seem daunting; however, early planning and thoughtful consideration of the requirements can lead to a smooth adoption process. BKD has helped organizations early adopt the standard by advising how the requirements affect their specific situations, and we’ve also provided technical resources and helped develop example disclosures.
Based on our experience working with early adopters, some haven’t known where to begin or how the requirements apply to their organization. A common challenge for early adopters has been which amounts to include in the nonfinancial current assets liquidity disclosure. In addition, some organizations have complex liquidity considerations surrounding internal restrictions and endowment appropriations. Fortunately, both the American Institute of CPAs (AICPA) and BKD have developed guidance and examples detailing the requirements and flexibility in the disclosure. Early preparation and review of the liquidity disclosure by management and auditors prior to financial reporting deadlines will ease the adoption process. Remember, only the current-year information has to be presented in the year of adoption. Below is a list of items to keep in mind when considering liquidity and your approach to meeting general expenditures within 12 months of the balance sheet date:
- Are your resources designated or consumed for capital projects?
- Does your organization have a policy for establishing liquidity reserves?
- Does your policy cover designating assets as quasi-endowments, and what’s the rate of spending from this fund? If you don’t have a plan, you’ll need to document that while your organization doesn’t have a policy, the assets are available and may be spent at the board’s discretion.
- Do donor-imposed restrictions exist that might affect liquidity?
- Is some or all of your investment return available for spending?
- When do donor-imposed restrictions expire? Is expiration based on incurrence of expenses, the passage of time or another donor-specified event?
We’ve also helped clients adopt the new functional expense reporting requirements of the NFP reporting standard. Some early adopters believe these requirements were less difficult than the liquidity disclosures due to the existing Form 990 reporting requirement, which already presents certain functional expense information required under the new standard. Again, it is important to remember that only the current-year information must be presented in the year of adoption. Other lessons learned when adopting the functional expense requirement include:
- Keep it simple. Only break out material line items using the percentage of the total as a guide.
- Depreciation, utilities and interest should be spread across functions.
- Prepare a memo explaining the allocation methodology.
Net asset disclosures also were affected in this new NFP reporting standard. The standard requires enhanced disclosures for underwater endowments and expanded disclosures for net assets with donor restrictions. We noted that some early adopters found these expanded disclosures for net assets with donor restrictions to be more challenging than anticipated. One reason is that current- and prior-year information must be presented. Early adopters agreed the combination of temporarily and permanently unrestricted net assets wasn’t difficult; however, careful consideration must be made in compiling disclosures of how and when donor restrictions were created and expire. Donor-restricted net asset disclosures include:
- Donor restrictions subject to expenditure for a specific purpose.
- Donor restrictions subject to the passage of time.
- Donor restrictions subject to appropriation and expenditures when a specified event occurs.
- Endowment subject to spending and appropriation.
- Endowment held in perpetuity.
We’ve learned the adoption of the new NFP reporting standard is less overwhelming with proper planning and communication. With the required implementation date just around the corner, we encourage all NFPs to begin planning for the adoption of ASU 2016-14 now. BKD can help in the adoption process, including support in communications with your accounting team and governing board and assistance in preparing the updated disclosures and schedules. Contact Kelly or your trusted BKD advisor for assistance in preparing your financial statements under the new NFP reporting standard and in the implementation process.