New Requirements for Reporting Net Asset Restrictions – Totally Different or Just a New Name?
By this time, all Non-Profit Organizations (NPOs) have heard that the upcoming new standards under ASU 2016-14 will change the financial statement presentation for all NPOs starting with fiscal year ends December 31, 2018. One of the most significant changes that will affect almost all NPOs is the new presentation of net assets. While the name and presentation of the net assets will change on the financials, how the restrictions are tracked and followed will not change. Don’t think that what you have known in the past is going away!
Currently there are three types of net assets:
1. Permanently restricted – amounts designated by donors to be held in perpetuity,
2. Temporarily restricted net assets – amounts designated by donors that are restricted based on purpose (example: to build a new playground) or time (example: a $50,000 pledge to be paid over five years), and
3. Unrestricted net assets – all other amounts, some of which may be designated for a specific purpose by the board.
The new standards will essentially combine the permanently and temporarily restricted categories into one new category, “with donor restrictions” and all other amounts will be considered “without donor restrictions.” It is important to know that while the financial statement presentation will be modified, the different types of restrictions will still remain and they must continue to be tracked individually.
One new change for valuing net assets under ASU 2016-14 relates to underwater endowments. If a donor designates a specific amount of funds to be held in an endowment, and the market value falls below that initially pledged amount due to overspending or a less than favorable investment market, the negative “underwater” portion is to be separately disclosed in the “with donor restrictions” section as an “underwater endowment.” Previously, the amount would be netted with unrestricted net assets. Additional disclosures will be required to describe how the NPO will recover and maintain the initial donor restrictions.
When the ASU 2016-14 standards are applied to the annual financial statements beginning with year ends December 31, 2018, it is a good time for NPOs to take a fresh look at their financials and footnotes regarding net assets. The amounts that are restricted for each category must be disclosed in the footnotes or on the face of the financial statements by broad categories – temporary time restrictions, temporary purpose restrictions, or permanent time restrictions. NPOs may choose to describe the restrictions in more detail within each of the categories. Some areas of detail could be expanded to better tell the organization’s story, or some items currently may be disclosed at a level of detail that is no longer material or relevant.
Consult your Yeo & Yeo professional with any questions regarding the upcoming changes including but not limited to net asset designations under ASU 2016-14.