Towards the end of 2019, the majority of nonprofit organizations began their processes for adopting the new Accounting Standards Update (ASU) 2016-14. The ASU includes some widely publicized changes in the nonprofit presentation standards involving net asset classes, liquidity and availability and investment return, among others. Here are some of the main ways that ASU 2016-14 can impact your nonprofit and how you can use these changes to your advantage.
What is ASU 2016-14?
ASU 2016-14 brings significant changes for nonprofit entities. The goal is to improve the presentation of financial statements from the previous nearly 20-year-old model. The standard requires nonprofits to update the presentation and disclosure to provide more relevant information to donors, grantors, creditors and more.
The Importance of Liquidity Disclosures
One of the most time-consuming challenges is the required disclosure regarding liquidity and availability of resources. However, this requirement can be turned to your advantage if you use this new disclosure to help tell the story of your operations, your careful stewarding of resources and your plans for the future.
It’s important to gather both qualitative and quantitative information when considering liquidity and available funds. The quantitative information required is fairly standard—the financial assets available at the statement of financial position date to meet cash needs for general expenditures within one year. It’s the qualitative information—how your organization manages its financial resources—that can leave you searching for words as you draft your new disclosure.
The first step is to identify all financial assets and any limitations on availability of those financial assets for expenditure in the next 12 months. Start with the assets included in your statement of financial position and identify the financial assets—these can include cash, accounts receivable from operations, promises to give, your investment portfolio and ownership interests in other entities.
The next step is to carve out the financial assets available for use. For example, your investment portfolio is available for use, but only the anticipated amount related to the annual spending policy of your endowment portfolio is available for operations. You might consider including as available any board-designated funds, since these funds are only earmarked for specific use and designations can be removed if funds are needed for operations. Finally, take a close look at your donor-restricted funds; if normal operations include the granting of scholarships, then a reasonable amount of donor-restricted funds for this purpose could be included in your financial assets available for the next twelve months.
Now for the fun part! While not always discussed in this context, nonprofit organizations do have expectations regarding the management of resources and how they expect to meet needs over the next twelve months. These expectations are the basis for the qualitative discussion in your disclosure.
Discussion should include consideration of operational aspects such as the following:
If you have concerns that your total financial assets available for the next 12 months is larger than expected by your donor base, it’s important to take the time to discuss future plans for these funds. Are you anticipating the need to replace computer hardware or software? Will you be changing your physical location in the near future? These are just a few reasons why a nonprofit might have a substantial amount of financial assets on hand as of the end of the year.
The 2016-14 ASU is one reason why cost allocation is more important than ever. Make sure your Form 990 reporting is in accordance with the new guidelines.
Contributions Restricted by Donors for The Acquisition or Construction of Property
One of the changes required by the 2016-14 ASU is receiving less attention. It involves the release of purpose and/or implied time restrictions related to contributions restricted by donors for the acquisition or construction of property. The ASU requires application of the placed-in-service approach and no longer permits the release of restrictions as construction progresses or as the property is depreciated. The entire portion of the net assets with donor restrictions related to the property should be released when the property is placed in service.
This may be a major change from how many organizations have recorded releases related to net assets restricted by donors for the purchase or construction of property prior to ASU 2016-14. If the property, plant or equipment being depreciated was contributed to the organization with an explicit donor-imposed restriction on the length of time of the item’s use, net assets with donor restrictions should be reclassified as net assets without donor restrictions in the statement of activities as those restrictions expire (for example, when the construction project was completed and the assets were placed in service). It’s important to review net assets to identify potential expired restrictions.
Seem like a lot? Our team can make sure that no aspect is overlooked in the implementation of ASU 2016-14.