Changes to Net Assets Under the New FASB Nonprofit Standards

Nonprofits with years ending December 31, 2018, and later will implement the new nonprofit accounting standard, FASB ASU 2016-14, Presentation of Financial Statements of Non-Profit Entities. This new standard is the first significant change to nonprofit accounting in 20 years. The reporting of net assets will change under this standard.

Under current FASB standards, there are three classes of net assets: unrestricted, temporarily restricted, and permanently restricted. However, with changes to relevant laws (UPMIFA) in the past few years, the boundaries between the classes of net assets have been blurred. The new standard will reduce the classes of net assets to those with donor restrictions and those without donor restrictions. On the face, this is a simplification. It takes away determining the nuances of what is permanently restricted versus temporarily restricted. It also clarifies what has always been the case – that restrictions must come from donors.

However, in exchange for this simplification, significantly more disclosures will be required. The disclosures need to include information amount the nature and amounts of different types of donor-imposed restrictions. This disclosure includes things like support of particular operating activities, investment for a specified term, use in a specified future period, etc. Essentially, what was previously disclosed through a combination of the numbers indicating temporarily and permanently restricted net assets, and a narrative disclosure of what those net assets were restricted for, has now been moved completely to the footnotes.

Let’s assume you previously had two different purpose restrictions and a time restriction in temporarily restricted net assets; you had a single line item for temporarily restricted net assets and then typically a general explanation of the purpose restrictions and time restriction in the footnotes, without corresponding dollar amounts. Now you will need to quantify the dollar amount in the footnotes subject to each of the purpose restrictions and the time restriction. If a contribution is subject to both the purpose and time restriction, you will have to list it in a manner that is careful not to double-count it in the footnotes. Also, information about the amounts and purposes of board-designated net assets without donor restrictions shall be provided in the notes or on the face of the financials.

In addition, there are changes to how underwater endowment funds are reported. In the past, when a permanently restricted endowment fund had losses that brought the fair value below the original gift amount, the difference was recorded as unrestricted net assets, so that the permanently restricted net assets were never below the original gift amount. This caused a lot of confusion and additional accounting record keeping. Under the new standard, the fair value of the endowment fund will be the amount reported as with donor restrictions, regardless of whether it is underwater. However, in exchange for that simplification, additional disclosures are required. The entity must disclose:

• their policy and actions taken related to appropriation from underwater endowment funds (such as whether the organization does any appropriations, reduced appropriations, etc. when a fund is underwater),
• the aggregate fair value of underwater endowment funds,
• the aggregate original gift amounts of the underwater endowments, and
• the aggregate amount by which endowments are underwater.

Contributions of long-lived assets previously had an accounting election to determine if they were released from restriction using a placed-in-service approach or over their estimated useful life. As part of the simplification effort, FASB will require all nonprofits to use the placed-in-service approach, unless there are explicit donor stipulations.

Overall, less detail will be required on the face of the financial statements. This may allow for easier accounting in some cases. However, all of the information that was previously needed for the face of the financial statements will now be disclosed in the footnotes, and in many cases will be disclosed in more detail than previously required. In the midst of all the transition, ensure that the required information is readily available to make those required disclosures.