Opportunity Knocks: A Deeper Dive in To Net Asset Changes of NFP Financial Reporting
By Richard Wright, CPA, Assurance Partner
As we approach the impending adoption of the new financial reporting model for nonprofits, it was no surprise that ASU 2016-14 was a hot topic at the recent AICPA Not-For-Profit Conference in Washington D.C. While the industry faces challenges beyond financial reporting, several sessions were dedicated to a deeper dive into implementation of key provisions of the new standard.
Reflecting on the conference, it occurred to me that the sibling standards FAS 116 and 117 have been the benchmark for nonprofit financial reporting during pretty much my entire professional career of 25 years. During this time, I’ve been challenged to explain to management and the board of many nonprofit clients just exactly what unrestricted net assets represents, including board designations on a nonprofit’s resources. Yes, change can be difficult, but the new financial reporting model affords nonprofits an opportunity to ensure readers of their financial statements better understand the limitations of and commitments on what are now regarded as net assets “without restriction”.
Before diving into the specifics, as a reminder, key objectives of ASU 2016-14 include improving the net asset classification scheme, as well as improving information included in the financial statements and notes so that nonprofits could “better tell their story”, which has become the common battle cry for adopting the new standard. Under the existing nonprofit GAAP, unrestricted net assets is sort of the second cousin of the financial statements, with much of the emphasis placed on donor restricted resources. However, as you know, even significant unrestricted net assets don’t necessarily translate to a reserve of assets available to expend. Net asset provisions of the new nonprofit guidance have attempted to address this issue in financial reporting by connecting the dots and giving nonprofits the flexibility to provide more specific information about net assets without restriction.
As you’ve heard by now, the minimum presentation requirement for net assets simplifies reporting by aggregating net assets as either with or without donor restriction in the statement of financial position and statement of activities. However, taking a closer look at the guidance, beyond the minimum reporting presentation, ASU 2016-14 allows for an alternative disaggregation of net assets without restriction on the statement of financial position into categories reflecting self-imposed limits that the governing board of a nonprofit has placed on its available resources, such as an operating reserve, quasi-endowment or future capital project. Space limitations can often steer a nonprofit to provide more information in footnote disclosures, but by identifying board-designations on the face of the financial statements, which, when combined with the presentation of net asset with donor restrictions, can more readily provide transparent and clear information about net assets to a reader.
The new FASB ASC Master Glossary definition for board-designated net assets captures the topic of self-imposed limits and further clarifies that a governing board’s delegation of such designation decisions to internal management are considered to be board-designated net assets. In this respect, nonprofit boards will need to carefully assess what authority has been either explicitly or implicitly granted to management. To clarify decisions, identify self-imposed limits, and avoid confusion or misunderstanding regarding how net assets without restriction are being utilized, nonprofits should also consider establishing a specific policy that covers board-designations of net assets, whether or not the nonprofit has any such designations.
As you move past the pondering stage to formal adoption of ASU 2016-14, remember to place a specific emphasis on how your organization restricts the use of the net assets that you control, which is a fundamental building block of the future of nonprofit financial reporting.
If you have questions or need assistance, please contact your HoganTaylor professional.