Here are a few of the comments from CalCPA’s May 24, 2017 Not-for-profit conference about major overhaul of financial statement presentation that I thought would be of interest to others in the nonprofit community. This post addresses ASU 2016-14. Part 1 addressed tax, revenue recognition, and single audit update sessions.
Accounting update – The first presenter is a FASB staff person. While comments made are the presenter’s opinions, we ought to pay attention to such a person’s opinions. Another disclaimer is the following summaries are from me.
ASU 2016-14 is the document changing not-for-profit financial statement presentation. We all need to get to the place where ASU 2016-14 or 16-14 easily rolls off our tongues.
- Question has come up whether an organizations can continue to present information for donor contributions to endowment funds separate from other contributions with restrictions. The answer is yes.
- One option would be to break the with restriction column into separate columns for activity related to donor endowments and other restrictions. The minimum presentation requirements would still apply, meaning there would need to be a subtotal of those two columns (this would be the with restriction column) and a without restriction column, followed by a total. That would turn a three column presentation on the statement of activity into a five column presentation for each year.
- Another way to break out donor contributions to endowments from other restricted contributions would be to have separate line items within the with restriction column. Instead of just presenting a line item for donor contributions with restrictions, an organization could have two lines such as donor contributions to endowments followed by contributions with purpose restrictions.
- The reason for disclosing the organization’s endowment spending policy is so readers of the financial statements can assess whether the organization will be able to continue spending when endowments are underwater or whether the organization may need to curtail drawing from underwater endowments and thus impair programs.
- In terms of releasing donor restrictions for equipment when the asset is placed in service or implying a time restriction, the presenter’s perception is that only 5% of charities are using the implied time restriction approach. Thus the requirement to release such restrictions when the asset is placed in service will have relatively minimal impact.
- The liquidity requirements, both qualitative and quantitative, are expected to be the most difficult part of ASU 2016-14 to implement.
- One component of the liquidity disclosures will require concentrated thought and a heaping helping of professional judgment. Existence of a donor restriction would generally mean an equal amount of financial resources are not available to meet general expenditures and thus not a liquid asset. However, if the nature of the restriction is essentially a program that would otherwise be a general expenditure, then perhaps financial assets equal to that purpose restriction are a liquid asset. (You have to ponder that for a little while to grasp the ramifications.)
- What is the proper number of lines of detail for the newly required matrix presentation of functional expenses? Presenter suggests the emerging idea is that 20 lines is too many, 3 lines is too few, while 8 lines may provide a good level of detail.
- Ponder what percent of expenses have not been categorized after disclosing just three items: salary & benefits, interest, and depreciation. Might not need many more lines of detail after those costs are listed.
- The matrix presentation of expenses may not be presented in a supplemental schedule. Standards require such presentation either as a separate basic financial statement, on the face of the statement of activity, or in the notes. Emerging expectation is most organizations will likely put it in the notes.
Other FASB projects:
- FASB has a project addressing how to distinguish whether a particular transaction is revenue or contribution. Specifically this is going to address how to categorize government grants. Project is on a fast track with exposure draft expected in July 2017 with a 90 day comment period. After redeliberations, a final document is targeted for a release in the first quarter of 2018.
- Financial statement presentation issues that were moved into a Phase 2 before ASU 2016-14 was issued are not being addressed at the moment. It may be a few years before those postponed issues are worked on again.
Practical issues of financial statement presentation changes:
- The IRS will not be changing form 990 in response to ASU 2016-14. This was mentioned in this session and the tax update. Consider the extent of coding and programming changes needed in order to add a field of information or change the meaning of an item in the return. Consider the millions of filed returns and the critical need to keep track of all the historical information for all those entities when a particular field gets moved or redefined. The agency does not have the budget to take on that kind of extensive programming work. Both speakers said the IRS will address the impact of 16-14 in the 990 instructions.
- Consider the impact of 16-14 on loan covenants.