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NFP Reporting Exposure Draft, Explained: Net Asset Classes

Posted 12:00 PM by

Net Asset Classes

In April 2015, the Financial Accounting Standards Board (FASB) issued a Proposed Accounting Standards Update titled Presentation of Financial Statements of Not-for-Profit Entities (the Exposure Draft). FASB spent three-plus years developing the Exposure Draft, and if it becomes a final Accounting Standards Update, it would have a wide-spread impact on the financial statements of not-for-profits (NFPs).

The Exposure Draft is intended to improve NFP financial statements by better communicating information about net assets, liquidity and financial performance, as well as cash flows to donors, creditors and other users of NFP financial statements. None of the proposed amendments change the recognition and measurement of financial statement components but instead focus on changes to their presentation and related disclosures.

The summary below focuses on the proposed changes impacting net assets. Additional installments of NFP Reporting Exposure Draft, Explained will provide information on other proposed changes.

All of the proposed requirements presented in the Exposure Draft are tentative until a final Accounting Standards Update is issued.

Current Guidance

Current guidance specifies three classes of net assets—unrestricted, temporarily restricted and permanently restricted — and net assets are classified based on donor-imposed restrictions. Confusion in this area often relates to the “unrestricted” net asset classification, which may or may not represent liquid resources available to the NFP. Classification of net assets is based solely on whether or not there is a donor-imposed restriction; unrestricted net assets may include balances restricted by laws, contacts, debt agreements and boards, which may not be available for current use.

In addition, the classification of donor-restricted endowments generally requires the original gift value to be reported as permanently restricted net assets, though under the Uniform Prudent Management of Institutional Funds Act (UPMIFA), NFPs “may appropriate for expenditure or accumulate so much of an endowment fund as the institution determines is prudent for the uses, benefits, purposes, and duration for which the endowment fund is established.”

To date, UPMIFA has been enacted by all states, except Pennsylvania, the District of Columbia and the U.S. Virgin Islands. Considering UPMIFA, NFPs may spend “permanently” restricted net assets if deemed prudent, which blurred the distinction between temporarily and permanently restricted net assets. Current guidance requires funds that have fallen below the original gift value, often called “underwater funds,” to be presented as a reduction to unrestricted net assets, thus maintaining the original gift value in the permanently restricted net asset category.

Proposed Guidance

The proposed guidance provides for two classes of net assets: net assets with donor restrictions and net assets without donor restrictions. This change, which provides more precise terminology while reducing complexity, would also remove the hardline distinction between temporary and permanent restrictions to focus instead on how and when resources can be used. 

FASB believes that additional information about net assets with donor-imposed restrictions may be more effectively provided in the footnotes to the financial statements. Thus, current requirements related to the disclosure of the nature and amounts of different types of restrictions are maintained in the Exposure Draft, which may be presented on the face of the statement of financial position or in the footnotes. For a full example, go to page 74 of the Exposure Draft.

Enhanced disclosures have been proposed related to board-designated and other self-imposed limits on net assets, some of which are demonstrated in the following chart.

Exposure Draft board-designated net assets

The proposed guidance modifies the classification of underwater endowment funds. Reporting the underwater portion as a reduction of net assets without donor restrictions will not be required. Instead, such balances would be presented within net assets with donor-imposed restrictions.

Enhanced disclosures have been proposed related to underwater endowment funds, which requires disclosing the aggregate amount of underwater endowment funds, the aggregate of the original gift amounts (or level otherwise required by donor or law) and any board policies or decisions related to spending of such funds.

About the Author
Amanda Horvath is a director in Katz, Sapper & Miller’s Audit and Assurance Services Group. Amanda provides a wide variety of services, including financial statement audits, reviews and consulting projects involving compliance, and internal control issues. Connect with her on LinkedIn.

Comments (2)
Nick Wallace wrote
Great article! Looking forward to comments on Operating Measure, Functional Expenses and Statement of Cash Flow changes. One issue on the net asset changes for higher education is the need to have the expendable portion of endowment net assets identified. Numerous key ratios are computed using that number (including ratios computed by the regulatory body Department of Education). It will also be very helpful for organizations that are "brick and mortar intensive" to display the net investment in property, plant and equipment. this is similar to the GASB property and equipment equity disclosures. This is a very important subcomponent of "without donor restrictions equity" and is very critical for understanding liquidity which is a goal of the FASB document, but the exposure draft was sadly missing any discussion of this topic.
Posted Jun 12 2015 4:25 PM
Susan K wrote
Thank you for information, Amanda. The proposed presentation change provides clarity and less possible misinterpretation of funds available.
Posted Aug 12 2015 2:21 PM
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