by Johnson Olatunji, Audit Manager – McConnell & Jones LLP
In April 2015, the Financial Accounting Standards Board (FASB) issued a Proposed Accounting Standards Update titled Presentation of Financial Statements of Not-for-Profit (NFP) Entitles (the Exposure Draft). The Exposure Draft is intended to improve NFP financial statements by better communicating information about net assets, liquidity and financial performance, as well as cash flows to donors, creditors and other users of NFP financial statements. None of the proposed amendments change the recognition and measurement of financial statement components but instead focus on changes to their presentation and related disclosures.
The summary below focuses on the proposed changes impacting net assets. All of the proposed requirements presented in the Exposure Draft are tentative until a final Accounting Standards Update is issued.
Current guidance specifies three classes of net assets-unrestricted, temporarily restricted and permanently restricted – and net assets are classified based on donor-imposed restrictions. Confusion in this area often relates to the “unrestricted” net asset classification, which may or may not represent liquid resources available to the NFP. Classification of net assets is based solely on whether or not there is a donor-imposed restriction; unrestricted net assets may include balances restricted by laws, contracts, loan agreements and boards, which may not be available for current use.
In addition, the classification of donor-restricted endowments generally requires the original gift value to be reported as permanently restricted net assets, though under the Uniform Prudent Management of Institutional Funds (UPMIFA), NFPs “may appropriate for expenditure or accumulate so much of an endowment fund as the institution determine is prudent for the uses, benefits, purpose, and duration for which the endowment fund is established. Current guidance requires funds that have fallen below the original value (underwater funds) to be presented as a reduction to unrestricted net assets, thus maintaining the original gift value in the permanently restricted net asset category.
The proposed guidance provides for two classes of net assets: net assets with donor restrictions and net assets without donor restrictions. This change, which provides more precise terminology while reducing complexity, would also remove the hardline distinction between temporary and permanent restrictions to focus instead on how and when resources can be used.
FASB believes that additional information about net assets with donor-imposed restrictions may be more effectively provided in the footnotes to the financial statements.
The proposed guidance modifies the classification of underwater endowment funds. Reporting the underwater portion as a reduction of net assets without donor restrictions will not be required. Instead, such balances would be presented within net assets with donor-imposed restrictions. Enhanced disclosures have been proposed related to underwater endowment funds, which requires disclosing the aggregate amount of underwater endowment funds, the aggregate of the original gift amounts and any board policies or decisions related to spending such funds.