Asu 2016 14

Certified Public Accountants and Consultants
Accounting Standards Update 2016-14: Presentation

of Financial Statements of Not-for-Profit Entities
www.jmco.com | info@jmco.com
Accounting Standards Update 2016-14: Presentation of
Financial Statements of Not-for-Profit Entities
The Financial Accounting Standards Board (FASB) issued an update in August
of 2016 that will require all nonprofit entities to change their financial
statement presentation. While change is often met with reluctance and
hesitancy, this standard is an opportunity for organizations to improve
their financial reporting and make it more informative and useful to board
members, grantors, and potential donors.
The new standard includes changes to both the statements themselves
(statement of financial position, statement of activities, statement of cash
flows, and statement of functional expenses) as well as the notes to the
financial statements. The effective date for implementation is for fiscal years
beginning after December 15, 2017; in other words, depending on your
organization’s year end, the year of implementation will be the year ended
December 31, 2018, June 30, 2019, or September 30, 2019.
In this article, we will not only help you understand how these changes
will impact your organization’s financial reporting, but also provide
tips, recommendations, and examples related to implementation. If
done correctly, implementation of this ASU can create better informed
board members, a better understanding between program and finance
departments, and a platform to attract grantors and donors with your
organization’s message.
Key Changes
There are six key areas of changes outlined by the standard, each with its
own unique challenges and opportunities. Each area has been summarized
below, including recommendations related to implementation and
references to example exhibits.
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1.
Reporting of Expenses
ASU 2016-14 requires disclosure and analysis of expenses by both natural
and functional classifications, as well as required disclosure related to the
method of allocation for functional categories. Voluntary health and welfare
organizations will already be familiar with this reporting, which is typically
done on the statement of functional expenses. This reporting model is now
expanding to all nonprofit organizations, so let’s discuss what it means.
Natural classification tells people how you spent your money, for example,
on salaries and benefits, office supplies, travel, advertising, grants to
subrecipients, etc. Functional classification tells people why you spent
your money, namely, for program services, management and general
expenditures (overhead), or fundraising. Both classifications provide
valuable information for different reasons. Management and the governing
board need to be informed on natural classifications in order to create
an effective budget and to pinpoint areas of potential savings. Grantors
and donors rely on functional classification to judge how efficiently the
organization is running—in other words, what percentage of total expenses
is going toward program services. With increasing pressure on organizations
to maintain high program expense ratios, cost allocation has become a
hot topic that is outside the scope of this article. If you have questions on
your cost allocation plan or indirect cost rate, please contact us for more
information.
As you can see, both natural and functional classifications provide value
to the organization, which is why they are now being required for all
nonprofit organizations. This change in reporting is a good opportunity for
management of nonprofit organizations to evaluate their current allocation
methodologies and class codes to ensure functional expense information
is being recorded correctly in the accounting software. See Exhibit 1 for an
example of a statement of functional expenses.
2.
Net Asset Classification
Under old FASB guidance there are three categories of net assets:
unrestricted, temporarily restricted, and permanently restricted. The
definition of and distinction between these three categories was sometimes
blurry, and note disclosures were lacking. Under ASU 2016-14, there are
only two net asset classes: net assets without donor restrictions, and net
assets with donor restrictions. You can probably gather from the names that
the new definitions are more straightforward:
Net assets without donor restrictions are funds that are received as general
revenues that can be used for any purpose. For example, if you have a
fundraiser or a contribution drive to raise general funds for the
organization, these are net assets without donor restrictions. In
Use these classifications some cases, you may hold a fundraiser for general purposes and
then the board will decide to designate a portion for a specific
correctly, or you could
program or purpose (e.g., to purchase a new vehicle or pay
unintentionally walk your down debt). These board-designated funds are considered net
assets without donor restrictions, but under new guidance these
organization into a donor designated amounts must be tracked and disclosed in the notes
restriction. to the financial statements. These board designations can be
lifted at any time through action of the board. This new disclosure
requirement provides an opportunity for organizations to examine
their current board designations and evaluate whether they are appropriate
or should be removed.
Net assets with donor restrictions are any funds you receive from a donor
or grantor that are for a specific purpose or are to be used within a specific
time frame. For example, if a donor writes you a check with a memo saying
it is to be used to purchase school supplies for children attending the
program, that donation is classified as net assets with donor restrictions
until it is spent for that specified purpose. The standard also requires that
the nature and amount of restrictions must be disclosed. This can be done
either on the face of the financial statements on the statement of activities
or in a note to the financial statements. See Exhibit 2 for example financial
statement presentation of net assets under the new guidance.
It is important to note that it is possible for the organization to
unintentionally walk itself into a donor restriction. For example, let’s say the
organization holds a fundraiser and notes on the flyer that “all donations will
go directly to providing meals for the homeless!” In this instance, the people
paying for the fundraiser are doing so with the understanding that their
donation is restricted for the advertised purpose. This is something to keep
in mind when holding fundraisers. While we know donors like to know their
money is going to a good cause, it is easy to get trapped in a situation where
you have an abundance of funds for programs but little to no net assets
without donor restrictions to pay salaries and other overhead expenses.
Maintaining a sufficient reserve in net assets without donor restrictions is
critical to a nonprofit organization’s financial health.
3.
Liquidity
The new standard does more than just change net asset classifications; it also
requires enhanced disclosures related to the organizations liquidity (i.e., the
cash you actually have available for emergencies). Organizations must now
disclose both quantitative and qualitative information related to the financial
assets available to meet cash needs for general expenditures within one year.
To do this, you start with the current assets on the statement of financial
position, and then subtract:
• Amounts subject to donor restrictions
• Amounts subject to board designations
• Amounts limited by the nature of the asset (e.g., the amount of
beneficial interests or endowments not realizable within one year)
These disclosures are useful to both internal and external parties, as they
provide valuable information on the financial health of the organization
and its ability to meet unforeseen cash needs. Analysis of these disclosures
may cause the board to consider creating a cash reserve, or it may inform
management of the need to appeal for more unrestricted grants and
donations. See Exhibit 3 for an example of liquidity disclosure.
While the indirect method of cash flow statements

will still be allowed, the direct method is preferred.
4.
Cash Flow Statement
You may already be familiar with the two methods of cash flow statement
preparation: direct and indirect. Under previous guidance, the organization
would have to present a reconciliation of indirect cash flow when presenting
under the direct method. However, this requirement is eliminated under
the new standard in an effort to encourage direct method presentation. It
is widely believed that the direct method is easier for financial statement
users to understand and provides a better snapshot of how the organization
spends its cash. While the indirect method will still be allowed under the new
standard, direct method is preferred. See Exhibit 4 for examples of the direct
method under new guidance. Additionally, another new standard (ASU 2016-
18, Restricted Cash) requires that cash restricted by donors and grantors be
combined with unrestricted cash in the statement of cash flows rather than
as a separate reconciling item.
5.
Underwater Endowments
An underwater endowment fund is endowment fund where the fair
value of the corpus of the endowment has fallen below the original
donation amount. Many endowments received in the mid-2000s were
quickly underwater due to the recession in 2008, and while some may
have recovered since then it is still possible that some organizations are
dealing with underwater endowments. Under the old guidance, these
endowments were shown as a reduction to unrestricted net assets (now net
assets without donor restrictions). Under the new guidance, underwater
endowments will instead be shown as a reduction in net assets with
donor restrictions, which is more appropriate given the substance of the
endowment. Additionally, the new standard requires disclosure of the
current fair value of the underwater fund, the original gift amount, and the
difference between the two (the amount of the fund deficiency). See Exhibit
5 for an example disclosure.
6.
Investment Return
Current guidance provides two options for presenting investment expenses
on the statement of activities. An organization can either net investment
expenses against investment income and present as net return on
investment as a component of revenues, or they can present investment
expense completely separate from investment income as a component of
expenses. Under the new guidance, net presentation as one line item in
the “Revenue and Other Support” section of the statement of activities
is required. This change also eliminates the requirement to disclose the
composition of investment return and the amount of investment expense.
This change encourages more comparable presentation of investment return
across nonprofit organizations.
Closing Notes
The changes we’ve discussed, while extensive, all serve to make the
financial statements of a nonprofit organization more understandable
and useful to the users of those statements. However, the IRS has not yet
updated the Form 990 to reflect the changes of ASU 2016-14. So while early
implementation is permitted, it will save your organization some headaches
to hold off on implementation until the tax forms are in line with the new
financial statement requirements. While implementation may be time
consuming on the front end, the result should be higher quality financial
reporting, increased understanding by the board and management of the
organization’s financial position, and enhanced ability to inform donors and
grantors on the organization’s financial health.
exhibit one Advisory
Program Services
Training Total
Management
& General
Fundraising &
Development
Costs of Goods
Sold Total
Grants & other assistance $ 294,261 $ - $ 294,261 $ - $ - $ - $ 294,261

Salaries & wages 6,769,754 1,061,585 7,831,339 370,234 254,176 - 8,455,749
Employee benefits 1,398,503 310,865 1,709,368 99,963 26,222 - 1,835,553
Payroll taxes 541,580 84,927 626,507 29,619 19,823 - 675,949
Professional services 1,306,807 87,197 1,394,004 12,780 1,704 - 1,408,488
Accounting fees - - - 40,073 - - 40,073
Legal fees - 7,939 7,939 - - - 7,939
Advertising & promotion 33,085 21,006 54,091 79,261 132,478 - 265,830
Office expenses 87,071 56,654 143,725 9,867 22,794 - 176,386
Information technology 37,858 606,535 644,393 12,399 14,653 - 671,445
Occupancy 446,601 29,799 476,400 14,918 55,427 - 546,745
Travel 170,957 18,283 189,240 149,292 - - 338,532
Conferences, conventions, & meetings 32,516 66,287 98,803 11,505 - - 110,308
Interest 387,428 - 387,428 - 9,457 - 396,885
Insurance 198,174 12,556 210,730 5,443 1,022 - 217,195
Training & development 457,617 20,659 478,276 9,113 33,669 - 521,058
Gift shop costs of goods sold 59,621 - 59,621 - - - 59,621
Cost of direct benefits to donors - - - - - 12,601 12,601
Depreciation & amortization 1,147,186 74,425 1,221,611 20,112 13,960 - 1,255,683
Bad debt expense - - - 16,892 - - 16,892
Other 31,569 5,977 37,546 2,122 7,474 - 47,142
Total expenses by function 13,400,588 2,464,694 15,865,282 883,593 592,859 12,601 17,354,335
Less expenses included with revenues
on the statement
Gift shop cost of goods sold (59,621) - (59,621) - - - (59,621)
Cost of direct benefits to donors - - - - - (12,601) (12,601)
Total expenses included in the
expense section on the statement of
activities $ 13,340,967 $ 2,464,694 $ 15,805,661 $ 883,593 $ 592,859 $ - $ 17,282,113
exhibit two Net Assets [The level of detail presented here is not required, however if the information
presented on the face is not sufficiently detailed, it must be included in notes.]
Without donor restrictions

Undesignated 3,057,607 1,370,401
Designated by the Board for operating reserve 300,000 250,00
Designated by the Board for endowment 15,511,186 14,912,222
Invested in property and equipment, net of related debt 21,150,885 20,193,878
40,019,678 36,726,501
With donor restrictions
Perpetual in nature 22,864,750 22,450,146
Purpose restrictions 14,228,316 10,351,233
Time-restricted for future periods 1,391,825 1,279,636
Underwater endowments - (42,677)
38,484,891 34,038,338
Total net assets 78,504,569 70,764,839
Total liabilities and net assets $ 94,314,447 $ 86,137,541
exhibit three
Note 2 - Liquidity & Availability
Financial assets available for general expenditure, that is, without donor or other restrictions limiting their use, within
one year of the balance sheet date, comprise the following:
Cash & cash equivalents $ 4,851,231

Accounts receivable 312,216
Operating investments 723,006
Promises to give 985,846
Distributions from assets held under split-interest agreements 145,000
Distributions from beneficial interests in assets held by others 180,110
Endowment spending-rate distributions and appropriations 1,115,664
$ 8,313,073
Our endowment funds consist of donor-restricted endowments and funds designated by the board as endowments. Income from donor-restricted endowments is restricted
for specific purposes, with the exception of the amounts available for general use. Donor-restricted endowment funds are not available for general expenditure.
Our board-designated endowment of $15,511,186 is subject to an annual spending rate of 4.5 percent as described in Note 9. Although we do not intend to spend from this
board-designated endowment (other than amounts appropriated for general expenditures as part of our Board’s annual budget approval appropriation), these amounts
could be made available if necessary.
As part of our liquidity management plan, we invest cash in excess of daily requirements in short-term investments, CDs, and money market funds. Occasionally, the Board
designates a portion of any operating surplus to its operating reserve, which was $300,000 as of December 31, 201X.
exhibit four 20X1 20X0
Cash Flows from Operating Activities
Program service payments received $ 13,410,429 $ 12,458,235
Membership receipts 373,781 355,044
Gift shop sales receipts 112,364 107,677
Receipts from federal & state contracts and grants 256,663 285,129
Contributions received, net of amounts restricted for long term purposes 4,264,113 2,647,976
Receipts from beneficial interests & assets held by others 114,989 272,402
Distributions from beneficial interests and assets held by others 182,521 155,717
Other cash receipts 101,275 82,710
Grants paid (294,261) (288,376)
Payments for salaries, benefits & payroll taxes (10,964,676) (10,734,090)
Payments to vendors (3,935,150) (4,086,056)
Interest paid (441,514) (493,767)
Net Cash from Operating Activities 3,180,534 762,601
Cash Flows from Investing Activities

Purchase of operating investments (275,000) (150,000)
Proceeds from sales of operating investments 173,520 109,761
Purchases of property and equipment (1,407,916) (875,456)
Proceeds from sales of property and equipment - 5,390
(Addition to) cash restricted to building project (500,00) -
(Addition to) withdrawal from assets held under split-interest agreements 88,476 (6,859)
(Addition to) withdrawal from endowment 541,671 (342,531)
Net Cash used for Investing Activities (1,379,249) (1,259,695)
Cash Flows from Financing Activities

Collections of contributions restricted to building project 500,000 -
Collections of contributions restricted to endowment 365,963 1,891,105
Payments to beneficiaries of split-interest agreements (76,588) (87,219)
Proceeds from establishment of split-interest agreements - 107,899
Net borrowings (repayments) under line of credit (50,00) 275,000
Proceeds from insurance of bonds and notes - 125,000
Principal payments on bonds, notes and capital leases (205,236) (423,568)
534,139 1,888,217
Net Cash used for Financing Activities
2,335,424 1,391,123
Net Change in Cash and Cash Equivalents
3,485,916 2,094,793
Cash and Cash Equivalents, Beginning of Year
Cash and Cash Equivalents, End of Year $ 5,821,340 3,485,916
exhibit five Underwater Endowment Funds with Deficiencies: From time to time, the
fair value of assets associated with individual donor-restricted endowment
funds may fall below the level that the donor or 82 SPMIFA requires NFP B to
retain as a fund of perpetual duration. Deficiencies of this nature exist in three
donor-restricted endowment funds that together have an original gift value
of $3,500, a current fair value of $3,300, and a deficiency of $200 as of June
30, 20XX. These deficiencies resulted from unfavorable market fluctuations
that occurred shortly after the investment of new contributions for donor-
restricted endowment funds and continued appropriation for certain
programs that was deemed prudent by the Board of Trustees.

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Certified Public Accountants and Consultants

Accounting Standards Update 2016-14: Presentation

While the indirect method of cash flow statements

Grants & other assistance $ 294,261 $ - $ 294,261 $ - $ - $ - $ 294,261

Without donor restrictions

Cash & cash equivalents $ 4,851,231

Cash Flows from Investing Activities

Cash Flows from Financing Activities

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