Endowment reporting under the new not-for-profit financial statement reporting requirements could be changing again.
On October 27, 2016, the Financial Accounting Standards Board (FASB) issued an exposure draft of a technical correction to clarify the reconciliation disclosure not-for-profit organizations will have to make for their endowment funds.
In its accounting standards update (ASU) 2016-14, - Not-for-Profit Entities - (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities, the FASB spells out several changes designed to make financial statement reporting more transparent. One of the measures is that a not-for-profit organization should disclose, for each period within its financial statement, a reconciliation of the beginning and ending balances of its endowment funds. The disclosure includes endowments in total and by net asset class, including net investment returns, contributions and amounts appropriated for expenditures that contain no purpose restrictions.
The phrase “no purpose restrictions” raised questions among stakeholders about the minimum requirements for the reconciliation that nonprofit organizations are required to disclose if they have endowment funds. The technical correction exposure draft removes the “no purpose restrictions” phrase from the not-for-profit financial statement accounting standards update.
How the Proposed Technical Correction Affects Other Endowment Reporting
Other disclosures for endowment funds in the financial statement accounting standard are not affected by the technical correction. Not-for-profits will still be required to disclose a description of their governing board’s interpretation of the net asset classification of donor-restricted endowment funds, including the interpretation of the ability to spend from underwater endowments.
Disclosures will be required to explain a not-for-profit’s endowment spending policies, including any spending that comes from underwater endowments. Investment policies for endowment funds will need to be spelled out, including return objectives and risk parameters, how those objectives relate to the endowment spending policies and the strategies used to meet the return objectives. Composition of the endowment assets will also need to be presented, in total and by asset type, with donor-restricted endowment funds separated from board-designed endowment funds.
Enhanced disclosures about underwater endowment funds will also be required. Reporting for underwater endowments was one of the key areas identified for change that led to the final accounting standards update. ASU 2016-14 requires disclosures including the:
- Policies on appropriating assets from underwater funds;
- Aggregate fair value of the underwater endowment;
- Aggregate of the original gift amount to be maintained or the level required by the donor; and
- Aggregate amount by which funds are underwater, which are to be classified as part of net assets with donor restrictions.
What to Expect Next
The technical correction is expected to be incorporated into a final accounting standards update on technical corrections and improvements to ASU 2016-14, which is due out in December 2016. Technical corrections made to the accounting standards update would be effective at the same time as the accounting standard update. Rollout of the changes begins in the 2018 calendar year.
For More Information
If you have any specific comments, questions or concerns about how the proposed technical update affects your organization, please contact us.
- Presenting the New Not-for-Profit Financial Statement
- Net Asset Classes and Governing Board Restrictions
- Presentation of Operating Cash Flows and Investment Returns
Michelle Spriggs is a Shareholder in the Not-For-Profit & Education Practice. She can be reached at 774.206.8336 or MSpriggs@cbiztofias.com.
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