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Accounting Standard Updates Enter Second Year

By Net Assets posted 06-04-2019 07:56 AM

  
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Financial Management |

Article by Christopher S. Maynard, Klatzkin & Company LLP

As we near the end of fiscal 2019, business officers can look back on a full year of implementing the (relatively) new not-for-profit accounting standard updates. The Financial Accounting Standards Board released ASU 2016-14 three years ago to streamline net asset classification and improve clarity about nonprofits’ liquidity, but the changes went into effect just last year. Here is a quick refresher on the changes and a few recommendations for schools still adapting to them.

ASU 2016-14 Requirements

The new accounting standard, which is officially titled "Presentation of Financial Statements of Not-for-Profit Entities," amends the existing Generally Accepted Accounting Principles to reduce complexity and provide financial statement readers with more useful information. Some of the standard’s most critical changes are to the following areas:

Expense Classifications

Nonprofits must group their expenses by both natural classification and functional classification. Grouping by natural classification is grouping by expense type. For example, the wages of the CFO, the hourly pay of the administrative help and the compensation of the instructional staff may all be grouped together as “salaries.” Functional classification groups expenses by their purpose, such as program, management and general, and fundraising. For instance, all program expenses would be grouped together, which may include salaries, equipment rental fees and textbooks.

Net Asset Classifications

Instead of classifying net assets as unrestricted, temporarily restricted or permanently restricted, ASU 2016-14 requires independent schools (along with other nonprofits) to group their net assets into two broad categories: net assets with donor restrictions and net assets without donor restrictions.

Statement of Cash Flows

Organizations may still choose to use the indirect or direct method of reporting cash flows, but if using the direct method, they are no longer required to reconcile the change in net assets to cash used in operating activities.

Liquidity Disclosure

Schools must qualitatively communicate how they manage their liquid resources available to meet cash needs for general expenditures within one year of the date of the statement of financial position. Schools must also disclose the amount and breakdown of those assets available at year-end.

Reporting Underwater Endowment Funds

Accounting for endowment funds has also changed. Endowment funds are taxpayer gifts in the form of cash, securities or other property that are restricted to certain uses. Typically the restrictions are imposed by the donor, who requires the funds to be used for a specific purpose or during a particular time period. When these endowment funds are held for years, their fair values will fluctuate as the market changes. When their fair market values dip below the values of the original gifts, we have what are known as “underwater endowment funds.”

Before this new accounting standard took effect, the value deficit of underwater endowments was reported separately from the gift itself and grouped into “unrestricted net assets.” Under ASU 2016-14, the deficit is subtracted from the endowment fund, and the net result is reported in “net assets with donor restrictions.” Reporting the net value of endowment funds gives financial statement readers a clearer picture of the asset’s true market value.

Independent schools must also alter their disclosures and reveal the breakdown between the original gift, the fair value and the value deficit. And they must disclose their policy for appropriating endowment funds and the steps they’ve taken to adhere to that policy.

New Information, New Processes

Some of these changes apply to the face of the financials, and others to the disclosures. School administrators may need to collect more information from donors than they have in the past to correctly classify donations with and without restrictions. The business office may also need to develop new processes for valuing the school’s endowment funds more regularly, determining liquidity and allocating expenses across their functional expense classifications. If you have questions or concerns about implementation, talk to your auditor.

Christopher S. Maynard, CPA, is a partner with the accounting and advisory firm Klatzkin & Company LLP where he serves as an advisor and auditor to independent schools and other nonprofit entities.

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