Published on January 24, 2014
MHMMessenger January 2014 TM M AY E R H O F F M A N M C C A N N P. C . – A N I N D E P E N D E N T C PA F I R M A publication of the Professional Standards Group Net Asset Classes to Shrink from Three to Two if FASB Implements New Rules The Financial Accounting Standards Board’s (FASB) Not-for-Profit Advisory Committee (NAC) in September 2013 recommended changes in accounting rules designed to allow not-for-profit organizations to better report their finances. FASB tentatively decided to merge the three existing net asset classes currently required for not-for-profit financial reporting into just two: those with donor restrictions and those without. According to the NAC, the committee’s aim in revisiting current net asset classifications is to determine how they can be “relabeled or redefined, in conjunction with improving how liquidity is portrayed in a not-forprofit’s statement of financial position and related notes.” Net Asset Classes The proposed change from three classes to two would remove the distinction between temporary restrictions and permanent restrictions. Not-for-profits would be required to “describe the differences in the nature of the restrictions and address both how and when those resources could be used,” according to the NAC, rather than differentiate temporary and permanent restrictions as they do now. our In addition, FASB said that while it doesn’t anticipate changes to the composition of unrestricted net assets, changes to the label are in order. FASB wants to modify the label to “Net Assets Without DonorImposed Restrictions” because, the board says, “the term unrestricted may create misconceptions as to the availability of net assets with that label.” While the NAC is focused on simplifying the presentation of the financial statements, FASB indicated some concern that important information could be lost with the new format. To prevent that, FASB tentatively decided to require disclosure about the composition of net assets at the end of the reporting period. Possible examples of such disclosures are reflected in the appendix to this Messenger. The major differences between these two examples are how the expendable and nonexpendable net assets with donor restrictions are presented. These examples are provided courtesy of NACUBO, an interested observer. Reaction from Colleges and Universities Many institutions of higher education have expressed concern over FASB’s potential changes. A key concern seems to be how rating agencies or the Department of Education would interpret the new presentation. Schools worry specifically about how agencies might use the new presentation to calculate the numerator, or “expendable net assets,” for an institution’s primary reserve ratio. roots run deep TM © 2 0 1 4 M AY E R H O F F M A N M C C A N N P. C . 877-887-1090 • www.mhmcpa.com • All rights reserved.
MHMMessenger To prepare for the possibility of these and similar changes, institutions should provide sufficient detail in their financial statement notes to ensure statement users are able to fully understand when and how net assets with donor-imposed restrictions can be used. In addition, institutions should highlight any net assets with donor-imposed restrictions that are not permanently restricted. Schools should clearly explain that, “unless there is a restriction in perpetuity, all net assets are expendable to support mission-related activities into the future.” While these FASB changes are only tentative, they are likely. An exposure draft of final recommendations is anticipated by the first half of 2014. In order to keep you up-to-date on FASB related projects, we will be focusing a future newsletter topic on decisions reached at the October and December meetings, specifically the tentative decisions to improve the Statement of Cash Flows and Statement of Functional Expenses. For more information If you have any specific questions about how these proposed changes might impact your institution, please contact Michelle Spriggs of MHM’s Professional Standards Group or your MHM service professional. You can reach Michelle at firstname.lastname@example.org or 774.206.8336. The information in this MHM Messenger is a brief summary and may not include all the details relevant to your situation. Please contact your MHM auditor to further discuss the impact on your audit or audit report. 2 © 2 0 1 4 M AY E R H O F F M A N M C C A N N P. C . 877-887-1090 • www.mhmcpa.com • All rights reserved.
MHM Messenger 2014-01 Appendix: Net Asset Classes to Shrink from Three to Two if FASB Implements New Rules NACUBO Disclosure Examples (For Illustration and Discussion Only) Example 1: Composition of Net Asset Classes Net assets were composed as follows at June 30, 20X2 and 20X1, respectively: 20X2 20X1 Without donor restrictions: Available for use Net investment in Plant Board designated: For capital projects For debt repayment Quasi-endowment Total net assets without donor restrictions With donor restrictions: Expendable: For capital projects For scholarships For research Pledges pending receipt Endowment available for appropriation Nonexpendable: Endowment restricted in perpetuity Total net assets with donor restrictions Net assets released from donor restrictions Used for capital projects Used for financial aid Used for research Payments received on pledges Endowment payout for current operations Total net assets released from restriction Examples provided courtesy of NACUBO © 2 0 1 4 M AY E R H O F F M A N M C C A N N P. C . 877-887-1090 • www.mhmcpa.com • All rights reserved.
Example 2: Composition of Net Asset Classes Net assets were composed as follows at June 30, 20X2 and 20X1, respectively: 20X2 20X1 Without donor restrictions: Available for use Net investment in Plant Board designated: For capital projects For debt repayment Quasi-endowment Total net assets without donor restrictions With donor restrictions: Restricted for capital projects Restricted for financial aid Restricted for research Pledges pending receipt Endowment: Restricted in perpetuity Available for appropriation Total net assets with donor restrictions Net assets released from donor restrictions Used for capital projects Used for financial aid Used for research Payments received on pledges Endowment payout for current operations Total net assets released from restriction Examples provided courtesy of NACUBO © 2 0 1 4 M AY E R H O F F M A N M C C A N N P. C . 877-887-1090 • www.mhmcpa.com • All rights reserved.
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