On August 18, 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-14 Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities. In a seminar held earlier this month, Tate & Tryon audit partners Doug Boedeker and Jeff Quigley provided an overview of the key provisions required by ASU 2016-14 as follows:

In General:

FASB’s goal was to update the current nonprofit reporting model, by improving the readability and transparency of financial statements. The ASU is effective for fiscal years beginning after December 15, 2017. Early implementation is permitted.

Changes in Net Assets Reporting:

    • Under this update the three existing classes of net assets (unrestricted, temporarily restricted, and permanently restricted) are replaced with two new classes: 1) Net Assets WITH donor restrictions, and 2) Net Assets WITHOUT donor restrictions. Nonprofits will also be required to disclose information about the type, purpose, and amount of board-designated net assets.
    • 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 by law), are described as being “underwater.”  Historically these underwater amounts have been recorded as a component of unrestricted net assets. When implemented, this update will require underwater funds to be classified in net assets WITH donor restrictions.
    • Expanded disclosures will also be required to include the fair value of the underwater endowment funds, the original amount of the endowment, and the amount of the deficiencies of the underwater endowment fund. Similar to the current spending policy disclosures regarding the endowment as a whole, the organization will need to disclose its policies regarding its interpretation of the ability to spend from underwater funds, and any actions taken during the period concerning appropriations from such funds.

 

Statement of Cash Flows:

    • Nonprofit organizations can continue to use either the direct or indirect method when preparing the cash flow statement. However, the new ASU removes the requirement to prepare the indirect reconciliation when utilizing the direct method.

Reporting of Investment Return:

    • Nonprofits will be required to report investment return net of external and direct internal investment expenses.
    • Disclosure of the components of investment return (interest, dividends, gains and losses) is no longer required.

Enhancements to Expense Reporting:

    • All nonprofits will now be required to disclose an analysis of expenses by both functional and natural classifications – either on the statement of activities, as a separate statement, or in the notes to the financial statements. Previously, only voluntary health and welfare organizations were required to disclose this information.
    • Expenses that are shown as reductions in revenue, such as salaries in cost of goods sold, or direct expenses of special events should be included in expenses in this new presentation.
    • Additionally, nonprofits will be required to disclose the methods used to allocate costs among program and support functions.
    • In the year of implementation, comparative prior year information is NOT required.

Management & General Expenses:

    • The ASU defines “management and general” and provides additional guidance regarding what should be included in those expenses. Only costs related to “Direct Conduct” or “Direct Supervision” of an activity can be allocated out of M&G.

New Liquidity Disclosures:

    • The ASU requires a qualitative description of how the nonprofit manages its resources in order to meet liquidity needs and manage liquidity risk.  Nonprofits will also be required to disclose a quantitative description that communicates the availability of “financial assets” to satisfy general expenditures within one year of the balance sheet date.
    • In the year of implementation, comparative prior year information is NOT required.

Release of Capital Asset Restrictions:

    • All nonprofits will be required to report the expiration of a restriction on a long-lived asset (such as a building) when the asset is placed in service, unless the donor explicitly limits the use of the asset for a period of time.

Nonprofit leaders are encouraged to consider these changes as early as possible to avoid any implementation issues or challenges that may arise. Please feel free to contact us if you need help implementing the new ASU.

INSIGHTS & RESOURCES

Tax-Exempt Organizations and 2017 Tax Reform

Posted on , updated on

Uncategorized11/23/2017

Dear Friends in the Tax-Exempt Community:
Below is a brief overview of the key tax reform proposals relating to tax-exempt organizations. As you know, Congress is currently putting together legislation to effect significant tax reform with a timeline of having it enacted this year. Although Congress is still negotiating, the following reform proposals may impact your […]

Royalty Income of Nonprofits is Being Targeted for Taxation!

Posted on , updated on

Uncategorized11/20/2017

The Senate Finance Committee’s version of the Tax Cuts and Jobs Act includes a number of items that would impact nonprofits.
Perhaps the most immediately significant is the provision that would call for taxing the revenue generated from royalties related to licensing a nonprofit’s name and/or logo. Royalty revenue has traditionally been exempt from income taxes. […]

How Could Federal Tax Reform Impact Nonprofits?

Posted on , updated on

Exempt Organization Tax11/17/2017

Uncategorized11/17/2017

By:  Doug Boedeker, CPA, Partner
It has been a challenge staying current on the twists and turns involved with the proposals for Federal Tax Reform. Many of the ideas within the tax reform package have a direct impact on nonprofit organizations.
Charitable deductions, executive compensation, employee fringe benefits, and intermediate sanctions are just some of the “hot […]

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