Prior to the adoption of ASU 2016-14, Presentation of Financial Statements of Not-for-Profit Entities, not-for-profit entities (NFPs) were required to segregate net asset disclosures between temporarily restricted, permanently restricted and unrestricted. To reduce confusion and enhance transparency, ASU 2016-14 reduces the number of classes of net assets from the above three to two – net assets without donor restrictions and net assets with donor restrictions. A NFP must present total net assets with donor restrictions, total net assets without donor restrictions and total net assets in the statement of financial position. Footnote disclosures are required to include the timing and nature of restrictions, as well as the composition of net assets with donor restrictions at the end of the period. The disclosures will continue to show an analysis by time, purpose and perpetual restrictions.
Net Assets without Donor Restrictions
What was previously known as unrestricted net assets is now called “net assets without donor restrictions.” Board-designated net assets also fall under this classification.
Net Assets with Donor Restrictions
Permanently restricted and temporarily restricted net assets are combined into “net assets with donor restrictions.” This category includes amounts restricted by the donor in perpetuity, restricted for specified purposes, restricted by the passage of time and for amounts of underwater endowments.
Board-designated Net Assets
NFP Boards often earmark net assets for future programs, investments, contingencies, purchase/construction of fixed assets or other uses. These internally designated funds should be classified as net assets without donor restrictions and reported separately from externally restricted funds (i.e., funds restricted by a donor) either on the face of the financial statements or in a footnote disclosure.
Contributions to Acquire Long-Lived Assets
Contributions restricted by donors to acquire long-lived assets are still required to be classified as donor-restricted support. However, the release from restrictions are now classified to net assets without donor restrictions when the asset is acquired and placed into service, unless the donor placed a time restriction on the use of the asset. The option to release the contributions from restriction over the asset’s useful life has been eliminated by the standard.
Endowments that have a current fair value that is less than the original gift amount or amount required to be retained by the donor or law are known as underwater endowments. As part of the change to the classification of net assets, the new standard requires underwater investments to be classified in net assets with donor restrictions instead of the current classification in unrestricted net assets. Disclosures will be required to include the original amount of the endowment, the NFP’s policy relating to the spending of these funds and whether or not the policy was followed.
A good starting point to prepare for implementing the new net asset presentation would be to first review the organization’s records to ensure that all donor-restricted funds are correctly classified in the existing net asset categories.
ASU 2016-14 is effective for fiscal years beginning after December 15, 2017, and for interim periods within fiscal years beginning after December 15, 2018, with early adoption permitted. The standard should be applied on a retrospective basis when presenting comparative financial statements.
Diana Miller, CPA at Wiss & Company LLP, has extensive experience in public accounting for not-for-profit clients. She can be reached at (973) 786-2277 or firstname.lastname@example.org.