Guest post: Implementation of ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities

Image courtesy of Adobe Stock.

Julie Morgan, CPA, is an audit and accounting partner in the Orange County office of Ronald Blue & Co., CPAs and Consultants. Ms. Morgan works with many churches and other not-for-profit charities in Southern California. She has over 17 years experience in public accounting. The firm’s website is https://www.ronbluecpa.com

Ms. Morgan provides the following overview of the soon to be implemented major changes in accounting and financial reporting for not-for-profit organizations. These changes will be required at the end of 2018.

 

By Julie A. Morgan, CPA

Some have hailed it “the most significant new guidance for not-for-profits in 20 years.”  So what is ASU 2016-14 all about, and how is it going to affect my non-profit?

We’ll get to that momentarily, but first, the effective date: Implementation of ASU 2016-14 is mandatory for all non-profits, effective “for fiscal years beginning after December 31, 2017.”  A number of our December 31, 2017 clients early adopted, and so far the experience has been significant for some clients, but not for others.

The main provisions of the ASU are as follows:

o          Terminology change and simplification of net assets categories

o          Liquidity and availability disclosures

o          Schedule of Functional Expenses (SOFE)

Terminology change and simplification of net assets categories

In a nutshell, the terms, unrestricted, temporarily restricted, and permanently restricted net assets have been replaced with new terms, unrestricted is now “without donor restrictions” and temporarily and permanently restricted have been combined to form one category “with donor restrictions.”  While the terminology change is straightforward, it does create clarity surrounding “donor restricted” and “endowments” versus “board designated” and “quasi-endowments.”

If you have any of these, this is your opportunity to ensure they are classified correctly.  For some of our clients, this simple change resulted in some reclassifications of net assets, and if the dollar amounts are large, you could have potential prior period adjustments.

Liquidity and availability – what do I need to know?

This is essentially a new footnote requirement, and does not necessarily affect your balance sheet.  Although, if you have any restricted cash (restricted by your lender or other contractual arrangement), and you’re not showing it as such, you should be showing that separately on your balance sheet.  The new footnote can be presented in either a narrative or a tabular format. It also requires disclosure of the amount of “cash available to meet operating needs for the next 12 months.”  Basically, if you take all your liquid cash and investments, and subtract any designated funds, reserves, quasi-endowments, and amounts “with donor restrictions”, you arrive at the “available cash” amount.

Some additional things to be aware of:  If your cash and liquid investments do not exceed your “with donor restrictions”, you should be prepared to explain this in a footnote.  Also, if you have board designated funds, reserve funds, or quasi-endowments, you may consider un-designating them to free up available cash.  While the new liquidity and availability footnote may be a wake-up call for some, the transparency it provides to the users of the financial statements (particularly banks and lenders) is significantly improved.

SOFE – how to prepare?

To create a Schedule of Functional Expenses (SOFE) for the first time can be cumbersome, depending on whether your accounting software is already set up to produce the necessary break-down of expenses.  So, how do you create a SOFE if you’ve never done one before?  Here are some tips we have been suggesting to our clients to make this process easier:

o          Considering your largest expense categories are typically salaries and benefits and facility-related expenses, a good approach would be to analyze your employees based on what percentage of their time they devote to each function; and/or to analyze your space (square footage). You can use this information to determine what percentage of the occupied space is devoted to each function and use this analysis to allocate these expenses to the functional categories.

o          If you expended resources to raise funds (i.e. advertising and promotion, a dedicated fund raising or donor development person), you will need to identify and separate those costs.  You will then show these expenses in the fund raising column.

Once you’ve tackled these major areas, the rest of your expenses can most likely be specifically identified quickly and easily into one of the functions. Expenses related to employees time can also be allocated on the basis of the time spent or space usage per the analysis above.

Closing remarks

If I could leave you with one word of advice, it would be this: don’t wait, begin preparing now for implementation of these new standards.

Just like when you’re cleaning out the basement, you may uncover some things you didn’t know were there.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: