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-for-profit’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.
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 Donor-Imposed 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 below. 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.
NACUBO Disclosure Examples (For Illustration and Discussion Only)
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.
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 specific questions about how these proposed changes might impact your institution, contact your CBIZ Tofias & Mayer Hoffman McCann Not-For-Profit & Education advisor here.
David Brown is a Director at CBIZ and a member of the Not-for-Profit Practice. He is based in the Minneapolis office and can be reached at 612.376.1205 or DBrown@cbiz.com.