Understanding ASU 2016-14: FASB’s New Nonprofit Standard

2. Today’s Agenda: • ASU 2016-14: FASB’s New Not-for-Profit Standard • ASU 2016-18: Statement of Cash Flows (Topic 230) – Restricted Cash • ASU 2014-09: Revenue from Contracts with Customers (Topic 606) • ASU 2016-02: Lease Accounting (Topic 842)

3. ASU 2016-14: FASB’s New Not-for-Profit Standard

4. ASU 2016-14: Take a minute • How many people have heard/know about the new ASU 2016-14 standard? • If yes, have you started preparing for the upcoming changes?

5. ASU 2016-14: Introduction • On August 18, 2016, the FASB issued Accounting Standards Update (ASU) 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities • The goal of this new standard is intended to improve financial statement presentation by not-for-profit (NFP) organizations

6. ASU 2016-14 Who does the standard pertain to?

7. ASU 2016-14: Who does the standard pertain to? The new guidance will affect substantially allNFP’s, including: • Charities • Foundations • Private colleges and universities • Nongovernmental health care providers • Cultural institutions • Religious organizations • Trade associations

8. ASU 2016-14 What are the requirements of this new standard?

9. ASU 2016-14: Requirements of the new standard The new guidance requires NFP’s to improve presentation and disclosuresto provide more relevant information about their resources (and changes in those resources) to their donors, grantors, creditors, and other users

10. ASU 2016-14: Requirements of the new standard • There are Qualitative and Quantitative requirements in a number of areas including: • Net asset classes • Investment return • Expenses • Liquidity and availability of resources • Presentation of Cash Flows

11. ASU 2016-14: Effective Date • The amendments are effective for: • Annual financial statements issued for fiscal years beginning after December 15, 2017 (calendar year 2018 for Dec 31 year ends), and, • Interim periods within fiscal years beginning after December 15, 2018 (FY 2018-19 for fiscal year-ends) • Early adoption is permitted

12. ASU 2016-14: Summary of the Changes The new standard has brought the following changes: • Net Assets classifications – Three to Two; Underwater endowments, required use of placed-in-service approach • Liquidity and Availability of resources – Additional disclosures now required • Expense Presentation & Reporting – Operating expenses by both, nature and function required; Change in Investment return/expense reporting • Statement of Cash Flows – Use of direct method of cash flows no longer requires a reconciliation to the indirect method of cash flows

13. ASU 2016-14: Transition • The amendments should be applied on a retrospective basis in the year that the update is first applied, and must include disclosure regarding the nature of any reclassifications or restatements and their effects, if any, on changes in the net asset classes for each period presented • If presenting comparative financial statements: • NFP’s may opt to omit the following (unless such information was previously a requirement): • Analysis of functional expenses, and, • Disclosures about liquidity and availability of resources for any periods presented before the period of adoption

14. 1. Net Asset Classification • The new guidance requires Not-for-Profits to present, on the face of the Statement of Financial Position, the amount for each of the two classes of net assets – Net Assets with Donor Restrictions and Net Assets without Donor Restrictions – as opposed to three • Current Net Assets ClassificationNew Net Assets Classification

15. 1. Net Asset Classification • Net Assets without Donor Restrictions: Represents the part of net assets that are available for general use and are not subject to donor-imposed restrictions • Included in net assets without donor restrictions are board-designated net assets • Board designated funds: Board-designated net assets are net assets without donor restrictions subject to self-imposed limits by actions of an entity’s governing board • Net Assets with Donor Restrictions: Represents net assets subject to donor-imposed restrictions • Donor-imposed restrictions may be temporary in nature: • Purpose restricted (ex: support for a particular activity, acquisition for a particular activity) • Time restricted (ex: restricted for a future use) • Donor-imposed restrictions may be permanent in nature

16. Net Asset Classification: Statement of Financial Position Net Asset Classifications are only required to be presented if applicable Must present a total for each of the two net asset classes Must present total net assets

17. Net Asset Classification: Statement of Activities Must present changes in net assets for each net asset class May present as one column or multiple columns Expenses to be only presented as “Without Donor Restrictions”

18. 1. Net Asset Classification: Required Disclosures • Disclosures for Net assets without donor restrictions: • Amounts, purpose and type of board designations included in net assets without donor restrictions • Actions by the Board that result in self-imposed limits on the use of resources without donor-imposed restrictions as of the end of the period

19. 1. Net Asset Classification: Required Disclosures • Disclosures for Net assets with donor restrictions: • Composition of restrictions including, timing and nature of restriction, including how and when, if ever, the restriction expires • Net assets released from restriction (purpose, time and appropriation of endowment amounts)

20. 1. Net Asset Classification: Underwater Endowments • ASU 2016-14 changes how endowments that have a current fair value < than the original gift amount (or amount required to be retained by donor or by law), known as “underwater endowments” are classified; rather than reducing unrestricted net assets for amounts by which endowments are underwater • Underwater donor-restricted endowments will now be included in “Net Assets with donor restrictions” • Enhanced disclosures now required, including disclosures of: • Governing board policies for reducing or ceasing spending from such endowments • The aggregate fair value • The aggregate original gift amount or level required to be maintained by the donor or law • The aggregate amount by which the funds are underwater

21. 1. Net Asset Classification: Placed-In-Service Approach • ASU 2016 eliminates the “over-time” approach of releasing long-lived assets to net assets without donor restrictions • ASU 2016-14 now requires Not-for-Profits to use the placed-in-service approach(without specific donor restrictions stating otherwise) to report: • Expirations of restrictions on gifts of cash, OR, • Other assets to be used to acquire or construct a long-lived asset • What does this mean? • The full gift amount will be reclassified from “with donor restrictions” to “without donor restrictions” when the acquired or constructed asset is placed in service • Reasons for change? • Intended to improve comparability and better reflect the economics of such transactions

22. 2. Liquidity and Availability of resources • Current Disclosure: Requires NFPs to disclose relevant information about the maturity of assets and liabilities • ASU 2016-14 Disclosure: The new standard requires new disclosures of Qualitative and Quantitative information about the liquidityand availability of resources to meet cash needs for general expenditure within one year of the balance sheet date

23. 2. Liquidity and Availability of resources (continued) • Qualitative information: Relates to information about liquidity and resources available to meet cash needs for general expenditures within one year • Liquidity – Relates to the type of Assets the NFP has and the maturity of those assets to meet current obligations • Quantitative information: Relates to information about financial assets available to meet cash needs for general expenditures within one year • Availability – Are these assets available for use? If yes, are there any donor imposed or other restrictions? Or even self-imposed restrictions?

24. 2. Liquidity and Availability of resources (continued) • Reasons for change: • Aimed at improving the ability of financial statement users to better assess an NFPs available financial resources and liquidity • Gives a better understanding of how an organization manages its risks • Added transparency for readers

25. 2. Liquidity and Availability of resources (continued) • Other things to consider: • The new disclosures may be presented in separate notes or combined into one • Financial assets include “liquid” assets such as cash, receivables, debt securities, and equity securities; but not fixed assets, prepaid expenses, or inventory

26. Examples of limitations that may make financial assets unavailable:

27. 2. Disclosures: Example Example: • Quantitative Information, either on the face of the balance sheet or in the notes, and additional information in the notes as necessary, that communicates the availability of an NFP’s financial assets at the balance sheet date to meet cash needs for general expenditures within one year of the balance sheet date:

28. 2. Disclosures: Example

29. 3. Expense Presentation: Classification • Current Guidance: Not-for-Profit entities must present expenses by Function • New Guidance: Requires all Not-for-Profits (not just voluntary health and welfare organizations) to provide information about their operating expenses by both: Nature and Function in: • The Statement of Activities, OR • A separate Statement (Statement of Functional Expenses), OR • A schedule in the Notes to the Financial Statement

30. 3. Expense Presentation Classification (continued) • Functional Classification: Expenses should be broken down into the entity’s major classes of Program Services and Supporting Services (Management & General, Fundraising, etc.) • Natural Classification: Examples include – salaries and wages, employee benefits, supplies, rent, depreciation, etc.

31. 3. Expense Presentation Classification (continued) • Additionally, ASU 2016-14 also requires NFP’s to provide enhanced disclosuresabout the methods used to allocate expenses between Program and Support functions • Certain costs benefit more than one function and, thus, should be allocated • Reason for this disclosure? • Aims to give a greater understanding of how resources are used and what an organization is paying for certain services • Increases transparency and comparability among all Not-for-Profits

32. 3. Expense Presentation Classification Example (continued)

33. 3. Expense Reporting: Investment Return/Expenses • ASU 2016-14 now requires NFPs to report investment returns net of related expenses including both, external and internal investment expenses, whereas under current GAAP, this presentation is optional • Purpose: To provide a more comparable measure of investment returns across all NFP’s, regardless of whether their investment activities are managed by internal staff or outside investment managers • The net presentation of investment returns means that expenses will be included in net assets categories in which investment returns are reported, that is, net assets with or without donor restrictions • Disclosure of the netted investment expenses is no longer required in the analysis of expenses. Moreover, disclosure of the components of investment return (investment income and realized/unrealized) are no longer required

34. 3. Expense Reporting: : Questions to consider • How are costs allocated among program and support functions? • Which expenses are based on actual costs and which are allocated? • How are salaries of supporting staff allocated?

35. 4. Statement of Cash Flows • The new guidance continues to allow Not-for-Profits to present either the Direct or Indirect Method of Reporting Cash Flows • However, the presentation or disclosure of the indirect method reconciliation is no longer required if the NFP uses the direct method of reporting cash flows • Reason for this change in presentation or disclosure? • Gives more flexibility to Not-for-Profits

36. ASU 2016-14: PHASE 2 – Next Steps • A future Phase 2 of the FASB’s Not-for-Profit project aims to address additional issues, including: • The presentation of operating measure, examples: • Whether to require intermediate measure(s) in the financial statements? • Whether and how to define such measure(s) and what items should be included? • Alignment of measures of operating in the statement of activities with measures of operations in the statement of cash flows • There is currently no expected timeframe for the completion of the second phase

37. Other New Standards: • Statement of Cash Flows – Restricted Cash • Revenue Recognition • Lease Accounting

38. ASU 2016-18: Statement of Cash Flows (Topic 230) – Restricted Cash

39. ASU 2016-18: Statement of Cash Flows - Restricted Cash • Effective Date: • Effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years • For all other entities, effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years within fiscal years beginning after December 15, 2019 • Early adoption is permitted, including adoption in an interim period • Should be applied using a retrospective transition method for each period presented • Who is affected? • Applies to allentities that have restricted cash or restricted cash equivalents and are required to present a statement of cash flows • Reason for change? • The new guidance helps clarify how entities should present restricted cash and restricted cash equivalents in the statement of cash flows

40. ASU 2016-18: Statement of Cash Flows - Restricted Cash • What does this standard change? • New standard requires the statement of cash flows to explain the change during the period in the total of cash and cash equivalents and amounts generally described as restricted cash/restricted cash equivalents • Therefore, restricted cash/restricted cash equivalents should be included with cash and cash equivalents when reconciling the cash amounts from the balance sheet to the statements of cash flows

41. ASC 2016-02: Lease Accounting (Topic 842)

42. ASC 2016-02: Lease Accounting (Topic 842) • Effective Date: • For a public entity, effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years • For all other entities, effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2018 • Early application is permitted

43. ASC 2016-02: Lease Accounting (Topic 842) • Reasons for this update? • Increase transparency and comparability among organizations • Who is affected by the amendments in this update? • All entities that enter into a lease would be affected; with some scope exemptions

44. ASC 2016-02: Lease Accounting (Topic 842) Major difference between previous GAAP and Topic 842 is: The recognition of lease assets and lease liabilities by lessees for those leases classified as Operating Leases under previous GAAP

45. ASC 2014-09: Revenue from Contracts with Customers (Topic 606)

46. ASC 2014-09: Revenue from Contracts with Customers (Topic 606) • Effective Date: • For a public entity, effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period • For all other entities, effective for annual reporting periods beginning after December 15, 2018 and interim periods within annual reporting periods beginning after December 15, 2019

47. ASC 2014-09: Revenue from Contracts with Customers (Topic 606) • Reasons for this update? • This update is the result of a joint project by FASB and IASB to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and IFRS • The new standard provides a comprehensive, industry-neutral revenue recognition model intended to increase financial statement comparability across companies and industries The new revenue standard will significantly affect the revenue recognition practices of most companies!

48. ASC 2014-09: Revenue from Contracts with Customers (Topic 606) • Who is affected by the amendments in this update? • This update affects any entity that either enters into contracts: • With customers to transfer goods or services, OR, • For the transfer of nonfinancial assets (unless those contracts are within the scope of other standards, example, lease contracts or insurance contracts)

49. ASC 2014-09: Revenue from Contracts with Customers (Topic 606) • What are the Main Provisions? • The core principle of the guidance is that an entity should recognize revenue to 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 • To achieve this core principle, an entity should apply the following steps: • Identify the contract(s) with a 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

50. Lets Recap!