Highlights of ASU 2016-14
We have noticed a lot of people searching for more information about ASU 2016-14. If your organization is on a calendar year, you may be going through your annual audit over the summer and having to deal with the new requirements. So we thought we’d give you a giraffe’s eye view of what you need to know about ASU 2016-14 in a Q&A format.
What is ASU 2016-14? What do the letters stand for?
ASU 2016-14 is a new accounting standard put forth by the Financial Accounting Standards Board (FASB), which promulgates U.S. accounting standards. ASU stands for Accounting Standards Update. ASUs are incorporated into the Accounting Standards Codification (ASC) which is also maintained by FASB. You can access both ASU 2016-14 and the Accounting Standards Codification at www.fasb.org.
So what’s the big deal? Why do I need to concern myself with ASU 2016-14?
ASU 2016-14 is the first major change to nonprofit financial reporting standards since SFAS 116 and 117 about 25 years ago! ASU 2016-14 affects how nonprofit organizations present information in their financial statements. If your organization issues financial statements that are audited, reviewed or compiled, you will need to present certain information differently in addition to some new information.
When is ASU 2016-14 effective?
ASU 2016-14 is effective for fiscal years beginning after December 15, 2017. That means 2018 calendar year financial statements and fiscal years beginning in 2018 are subject to the new rules.
What are the main changes?
ASU 2016-14 makes changes in 5 key areas:
- Net assets presentation
- Liquidity disclosures
- Statement of Functional Expenses
- Statement of Cash Flows
- Investment return presentation
For more information on these 5 key areas, read on!
What are the new net asset categories?
ASU 2016-14 presents net assets in two main categories:
- Net assets without donor restrictions, and
- Net assets with donor restrictions.
This presentation replaces the former three net asset classes:
- Temporarily restricted
- Permanently restricted
However, the old net asset categories have not gone away. You still have to deal with them as part of your regular accounting. Now the old net asset categories are organized under one of the two new overarching categories like this:
- Net assets without donor restrictions
- Board designated operating reserve
- Invested in property and equipment
- Net assets with donor restrictions
- Restricted for programs
- Restricted to the passage of time
- Restricted subject to the organization’s endowment spending policy
See our previous blog post New Take on Net Assets for more explanation on net asset classes.
What are examples of liquidity disclosures?
ASU 2016-14 requires quantitative and qualitative disclosures on liquidity in the notes to the financial statements.
Quantitative disclosures describe the detail of financial assets available to fund general operations within one year of the balance sheet date.
Qualitative disclosures describe the organization’s policies and procedures for managing liquidity. Of course this means your organization must now have policies and procedures for managing liquidity!
ASU 2016-14 includes examples of liquidity disclosures. Here is one example (ASC 958-210-55-7):
NFP A has $395,000 of financial assets available within 1 year of the balance sheet date to meet cash needs for general expenditure consisting of cash of $75,000, contributions receivable of $20,000, and short-term investments of $300,000. None of the financial assets are subject to donor or other contractual restrictions that make them unavailable for general expenditure within one year of the balance sheet date. The contributions receivable are subject to implied time restrictions but are expected to be collected within one year. NFP A has a goal to maintain financial assets, which consist of cash and short-term investments, on hand to meet 60 days of normal operating expenses, which are, on average, approximately $275,000. NFP A has a policy to structure its financial assets to be available as its general expenditures, liabilities, and other obligations come due. In addition, as part of its liquidity management, NFP A invests cash in excess of daily requirements in various short-term investments, including certificate of deposits and short-term treasury instruments. As more fully described in Note XX, NFP A also has committed lines of credit in the amount of $20,000, which it could draw upon in the event of an unanticipated liquidity need.
And here’s another example (ASC 958-210-55-7):
NFP A’s financial assets available within one year of the balance sheet date for general expenditure are as follows.
|Cash and cash equivalents||$ 4,575|
|Accounts and interest receivable||2,130|
NFP A’s endowment funds consist of donor-restricted endowments and a quasi-endowment. Income from donor-restricted endowments is restricted for specific purposes and, therefore, is not available for general expenditure. As described in Note Y, the quasi-endowment has a spending rate of 5 percent. $1.65 million of appropriations from the quasi-endowment will be available within the next 12 months. As part of NFP A’s liquidity management, it has a policy to structure its financial assets to be available as its general expenditures, liabilities, and other obligations come due. In addition, NFP A invests cash in excess of daily requirements in short-term investments. To help manage unanticipated liquidity needs, NFP A has committed lines of credit in the amount of $20 million, which it could draw upon. Additionally, NFP A has a quasi-endowment of $33 million. Although NFP A does not intend to spend from its quasi-endowment other than amounts appropriated for general expenditure as part of its annual budget approval and appropriation process, amounts from its quasi-endowment could be made available if necessary. However, both the quasi-endowment and donor-restricted endowments contain investments with lock-up provisions that would reduce the total investments that could be made available (see Note X for disclosures about investments).
We are starting to see a few financial statements issued under the new accounting standard that include liquidity disclosures. So far they are sticking pretty close to the above sample language and format. As we can gather more examples, we’ll keep you posted! In the meantime, see our previous post ASU 2016-14: Cash and Nonprofit Liquidity for the bigger picture surrounding this new requirement.
What are changes to the Statement of Functional Expenses?
Previously a Statement of Functional Expenses was required only for “voluntary health and welfare organizations.” No disclosure of allocation methodology was required.
ASU 2016-14 now requires disclosure of functional expenses for ALL nonprofit organizations. This means organizations that never had to disclose functional expenses before, such as churches, now must do so if they want to issue financial statements “in accordance with accounting principles generally accepted in the United States of America.”
ASU 2016-14 requires information on functional expenses to be reported in one location, which may be within the Statement of Activities, in the notes to the financial statements, or presented as a separate Statement of Functional Expenses. This flexibility in how expenses are reported may be especially helpful for smaller organizations.
Here’s a biggie: Organizations must now disclose their allocation methodology. Just how are you divvying up those expenses between programs, management & general and fundraising? We don’t recommend saying “We take a stab at it and make sure our allocations stay within the percentages our donors want to see.” See our series of posts on Nonprofit Overhead for details on how to assign expenses to functional areas!
What are changes to the Statement of Cash Flows?
Under the old standards as well as the new standards put forth by ASU 2016-14, organizations may use either the direct or indirect method for presenting the Statement of Cash Flows. The only change is if the direct method is used, organizations no longer need to show an indirect reconciliation.
OK, we are pretty sure that one is over most people’s heads. Maybe we’ll delve into Statement of Cash Flows in a future post for the accounting geeks. (We know a few of you are out there!)
Suffice it to say, this aspect of ASU 2016-14 will not affect most organizations.
What are changes to presentation of investment return?
Under the old rules, organizations were supposed to net external investment expenses with investment income.
Under the new standards put forth by ASU 2016-14, organizations are supposed to net both external and direct INTERNAL investment expenses with investment income.
This is one of those areas where the numbers on the 990 don’t agree with the numbers on your audited financial statements. On the 990, you must present investment income at the gross amount and show investment expenses as expenses, instead of a reduction in income.
This aspect of ASU 2016-14 will not affect most small organizations or organizations without investments.
Where can I read ASU 2016-14 for myself?
In your web browser, go to www.fasb.org. From there click on Standards, then Accounting Standards Updates Issued. Click on Issued in 2016. Then click on Update 2016-14. Here’s the direct link to save you the trouble of all those clicks:
From there click to Accept FASB’s terms and conditions, and then voilà you will see ASU 2016-14.
While it’s certainly a lot to keep up with (like you don’t have a ton of other things to do in a nonprofit organization), we think the new standards will be useful both for readers of financial statements and for managers of nonprofit organizations. The focus on nonprofit liquidity especially cuts to the heart of a problem that is all too common among nonprofits – a lack of liquidity!
How is your organization dealing with the changes brought about by ASU 2016-14? Please leave your comments!