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Part 3 FASB ASU 2016-14 Reporting Requirements White Paper

Part 3 FASB ASU 2016-14 Reporting Requirements White Paper

We’re pleased to make available the third and final segment of the three-part white paper series on FASB ASU 2016-14:

Click here to access FASB ASU 2016-14 Reporting Requirements for Not-For-Profit Organizations White Paper Series Part 3 of 3.

This 8-page document is a project plan to help you and your organization focus on task oriented items detailed in all three phases: understanding, preparing, and implementing.

Haven’t accessed Part 1 or Part 2? No problem! Use the links below.

Part 1 – Understanding. Preparing. Implementing. FASB ASU 2016-14 Reporting Requirements White Paper

Part 2 – Understanding. Preparing. Implementing. FASB ASU 2016-14 Reporting Requirements White Paper

Financial Technologies Management works exclusively with nonprofits – providing affordable accounting services, software, and technology.

With the Financial Accounting Standards Board (FASB) issuing a new accounting standards update specifically for nonprofits (ASU 2016-14) to improve the current net asset classification requirements and the information presented in financial statements and notes about a nonprofit entity’s liquidity, financial performance, and cash flows, this is considered a big change.

In fact, this is the first major set of changes to nonprofit financial statement presentation standards since 1993.

Part 3 in our 3-Part White Paper Series on Understanding. Preparing. Implementing. FASB ASU 2016-14 Reporting Requirements for Not-For-Profit Organizations is an active project plan to help you and your organization focus on task-oriented items detailed in all 3 phases; understanding, preparing and implementing.

Feel free to edit and alter this to make it work for your unique nonprofit environment. Not every task will apply to your nonprofit, and there will probably be tasks you will need to add. Part 3 is meant to help guide you and your team as you embark on satisfying the new FASB ASU 2016-14 reporting requirements.

If you don’t want to go it alone – the team at FTM is here to help. We’ve been serving nonprofits exclusively since 1999. We work with nonprofit to select and implement leading nonprofit accounting solutions.

We also provide accounting services, including outsourced accounting, for organizations that understand that professional attention to the organization’s financial accounting is a prerequisite for proper stewardship.

FASB proposes clarifications to accounting for grants and contributions

FASB proposes clarifications to accounting for grants and contributions

At a glance

A new FASB proposal will become effective in 2019 and will require nonprofits to account for grants from the government differently and may affect the timing of revenue and expense recognition for both recipients and funders of condition grants and gifts.

What happened?
On August 3, the FASB proposed rules that would require some grants received by not-for-profit entities (NFPs) to be accounted for under the contribution accounting model instead of the new revenue recognition standard. The proposed changes could also alter the timing of recognition of revenues or expenses for conditional grants and gifts under the contribution accounting model. While accounting for contributions primarily affects NFP entities, the proposed amendments would apply to all entities, including business entities that make contributions or grants.

Five-step approach for revenue recognition

The core principle of the new standard is that revenue recognition should “depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services” (ASC 606-10-05-3). To accomplish this objective, reporting entities are to apply a five-step approach:

  • Identify the contract with the customer.
  • Identify the performance obligations in the contract.
  • Determine the transaction price.
  • Allocate the transaction price to the performance obligations in the contract.
  • Recognize revenue when (or as) the entity satisfies a performance obligation.

Key provisions
The differentiator between a contribution and an exchange transaction is whether there has been an “exchange of commensurate value.” The exposure draft proposes enhanced guidance for determining when such an exchange has taken place between the parties to a grant or gift arrangement. In an exchange transaction accounted for under the new revenue recognition standard, reciprocal benefits flow directly between the parties to the arrangement. If benefits ultimately flow to the general public, rather than to the funder, the proposal would require that the arrangement be accounted for as a contribution, rather than as an exchange transaction. This might occur when, for example, a government agency uses a grant arrangement to outsource its own obligation to provide certain benefits to the public. Because NFPs and business entities generally account for federal grant awards as exchange transactions today, the proposal would be a significant change for NFPs. However, business entities would not be affected, because transfers of resources from governments to business entities are outside the scope of the contribution accounting guidance.

The proposal would shift revenue recognition for many grants received by NFPs from an exchange model to the model for “conditional contributions.” Consequently, the FASB also proposes changes that would clarify the accounting for conditional contributions.
Those changes would also affect donors and donees in gift transactions. When a gift or grant is conditional, neither the giver nor the receiver can recognize expense or revenue until the condition is satisfied. The proposal would redefine a “conditional” gift or grant as one that specifies a barrier that must be overcome to be entitled to the promised funds, along with a requirement that the funds be returned (or the promisor released from its obligation) if the barrier is not overcome. Unless a gift or grant includes these more restrictive provisions, gifts or grants deemed to be “conditional” today would no longer qualify. As a result, recipients would recognize contribution income, and grantors
or donors would recognize contribution expense, earlier than they do today.

Effective date
The proposed amendments would have the same effective date as the new revenue standard. For public business entities and conduit bond obligors with publicly-traded debt, the proposed rules would be effective for annual reporting periods beginning after December 15, 2017. Other entities would have an additional year.

Why is this important?
The proposed ASU would provide a more robust framework to determine when a transaction should be accounted for under the contribution accounting model or as an exchange transaction accounted for under other guidance (for example, ASC 606). In doing so, it seeks to harmonize the revenue recognition model used by NFPs for government grants, foundation grants, and charitable contributions. However, NFPs and
business entities could end up applying different revenue recognition models to similar grant transactions. The proposal also underscores the FASB’s intent that accounting for contributions should be consistent from the perspective of both the maker and the recipient of a contribution
or grant. Thus, the proposed changes for determining whether a contribution is conditional would apply equally to both resource providers and recipients.

Are you in Compliance with ASU 2016-4? Financial Statement Presentation of Not-for-Profit Entities

Update:

White Paper Available: “Understanding. Preparing. Implementing.  FASB ASU 2016-14 reporting requirements for Not-for-Profit Organizations

Overview

In November 2011, the Financial Accounting Standards Board (FASB) added a project to its agenda focusing on the financial reporting of not-for-profit (NFP) entities. The project has resulted in the issuance of Accounting Standards Update (ASU) No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities. The update strives to improve how a NFP organization classifies its net assets and provides information in its financial statements and notes about its financial performance, cash flows and liquidity.  We have summarized the full 270-page standard into this brief guide which outlines the primary changes to the financial statements of not-for-profit organizations.

Net Asset Classes

  • Replaces the current three net asset classes with the following two:
    • Net assets with donor restrictions
    • Net assets without donor restrictions
  • Removes hardline distinction between temporary and permanent restrictions
  • Enhances disclosure requirements:
    • Amounts and purposes of board-designated net assets
    • How restrictions affect the use of resources

Underwater Endowments

  • Presents deficits relative to original gift amounts of donor-restricted within the donor-imposed restrictions class of net assets
  • Enhances disclosure requirements:
    • Governing board’s policy related to appropriations from such funds
    • Any action taken during the period related to such funds
    • Original gift amount or level otherwise required to be maintained by the donor or law
    • Amount of the underwater endowments in the aggregate

Expiration of Restrictions – Long-lived Assets

  • Requires use of the “placed-in-service approach” for determination of when restrictions expire
  • No longer allows the recognition of the expiration of restrictions over the asset’s useful life

Statement of Cash Flows

  • May continue to elect either the direct or indirect method
  • When using the direct method, no longer requires the reconciliation of changes in net assets to cash flows from operating activities

Liquidity and Availability of Resources

  • Requires disclosure of qualitative information about how liquid resources are managed
  • Requires disclosure of quantitative information related to availability of financial assets to meet cash needs for general expenditures within one year, including impact of the following on financial assets:
    • Nature of the financial assets
    • External limits by donors, grantors, laws and contracts
    • Internal limits by the governing board

Investment Return

  • Requires external and direct internal investment expenses to be net against investment returns
  • Removes requirement to disclose amount of investment expenses net against investment returns
  • Clarifies what activities constitute direct internal investing activities:
    • Salaries and related expenses of staff responsible for the development and execution of investment strategy
    • Allocable costs associated with internal investment management and supervising, selecting, and monitoring of external investment management firms
  • Permits separate, appropriately labeled line items on the statement of activities for net investment return managed differently or derived from different sources
  • Eliminates the requirement to present investment return components for changes in endowment net assets

Reporting of Expenses

  • Requires all NFPs to report expenses by nature
  • Retains requirement to report expenses by function
  • Requires expense analysis by nature and function to be presented in one location, in either:
    • The statement of activities
    • A separate statement of expenses (similar to the statement of functional expenses)
    • A schedule in the notes
  • Enhances disclosures related to methods used to allocate costs among functions
  • Updates descriptions of management and general activities

Effective Date and Transition

  • Annual financial statements issued for fiscal years beginning after Dec. 15, 2017
  • Early application is permitted
  • Requires adoption on retrospective basis for all years presented, except for:
    • Analysis of expenses by nature and function
    • Disclosures related to liquidity and availability of resources

Don’t forget to take advantage of our free resource.   “Understanding. Preparing. Implementing.  FASB ASU 2016-14 reporting requirements for Not-for-Profit Organizations