1. FASB's New NFP Financial Statement Standard
A case-study: Capital University

2. Session Presenters Pamela Lebold, CPA
Shareholder, Maloney + Novotny LLC
Derrick Antwi, CPA, MAcc
Controller, Capital University
American Institute of CPAs®
Not-for-Profit Section

3. Objectives
Identify the changes with FASB’s new NFP financial statement standard
How the changes impact financial statement presentation
What changes that are still under discussion
What is the timing of the changes
CASE STUDY - adoption of the standard by Capital University
American Institute of CPAs®
Not-for-Profit Section

4. Background - Timeline FASB issued an exposure draft on April 22, 2015.
The Presentation of Financial Statements of Not-for-Profit Entities (Topic 958) addresses:
Improvement to the current net asset classification requirements.
Improvement to the information presented in financial statements and notes about an NFPs liquidity, financial performance, and cash flows.
Comments were due on August 20, 2015.

5. The New NFP Standard Issued August 18, 2016
ASU – Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities
Effective date is fiscal years beginning after 12/15/2017
12/31/18 or 6/30/19 year-end
American Institute of CPAs®
Not-for-Profit Section

6. Items Still in Process Phase two of the new standard
Operating Measures
Whether to require intermediate operating measure(s)
How to define operating measure(s) What should or should not be included in the measure(s)
Statement of Cash Flows
Realignment of certain items
Expense Reporting
American Institute of CPAs®
Not-for-Profit Section

7. Key Changes in New NFP Standard-
Net Assets Classes
Investment tur
Not-for-Profit Section

8. Net Asset Classes
Address the complexities with the current three classes of net assets
Address misunderstandings about the term “unrestricted net assets”
Address deficiencies with restrictions imposed by donors, laws, etc. that impact an NFP’s liquidity and classes of net assets
American Institute of CPAs®
Not-for-Profit Section

9. Three to Two Net Asset Classes
UnrestrictedNet Assets
Temporarily Restricted Net Assets
Permanently Restricted Net Assets
Current Presentation
New Presentation
Without “Donor”
Restrictions
With “Donor” Restrictions
American Institute of CPAs®
Not-for-Profit Section

10. Net Asset Classifications
Two classes
With donor/grantor-imposed restrictions
Includes permanent and temporary
Without donor/grantor-imposed restrictions
Also includes board designated
Requirements for Disclosure
Composition of net assets with donor/grantor restrictions
How/when resources (net assets) can be used
Specified purpose, time
Perpetual (endowment)
Quantitative and qualitative information about board designations
American Institute of CPAs®
Not-for-Profit Section

11. Balance Sheet
Implementation –

12. Balance Sheet
Implementation –

13. Statement of Activities
Implementation

14. Board-Designated Net Assets
New required disclosure of nature and amounts of board-designations of net assets, defined with the following:
Net assets without donor restrictions subject to self-imposed limits by action of the governing board.
Board-designated net assets which are earmarked for future programs, investment, contingencies, purchase or construction of fixed assets, or other uses.
If a governing board delegates designation decisions to internal management, these are considered to be included in board-designated net assets.
Definition indicates a need for NFPs to have policies and/or practices regarding board-designations on net assets; even if no designations.
Not-for-Profit Section

15. Board-Designated Disclosure Example
Note 10 – Net Assets without Donor Restrictions
The Board of Directors of ABC School has several standing board policies that impact the presentation of board designations on net assets. Bequests without donor restrictions are designated for long-term investment (quasi-endowment). Additionally, the Board of Directors has established an operating reserve in the event of financial issues or liquidity concerns. The operating reserve totaled $14,500 at December 31, 201X.
Not-for-Profit Section

16. Donations or Contributions Restricted for
the Purchase of Property & Equipment
The new standard also requires that for gifts of cash restricted for acquisition and construction of property and equipment (in the absence of explicit donor restrictions), all NFPs would be required to use the “placed in service” date as the date of releasing these assets from restriction.
The previous “over time” approach for the expiration of restriction on capital gifts is eliminated.
American Institute of CPAs®
Not-for-Profit Section

17. Underwater Endowments
New FASB definition:
Donor-restricted endowment fund for which the fair value of the fund at the reporting date is less than either the original gift amount or the amount required to be maintained by the donor or by law that extends donor restrictions.
Report entire balance of endowment fund within “with donor restrictions” of net assets.
Disclosures –
Fair value and original amount of underwater endowment
Policy related to the spending from these funds
Was the policy followed?
American Institute of CPAs®
Not-for-Profit Section

18. Underwater Endowments – Disclosure
From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the level that the donor or UPMIFA requires the Organization to retain as a fund of perpetual duration. NFP A has a policy that permits spending from underwater endowment funds depending on the degree to which the fund is underwater, unless otherwise precluded by donor intent or relevant laws and regulations.
As of June 30, 201X, three donor-restricted endowment funds had aggregated original values totaling $30,500, current fair values totaling $30,000, and deficiencies totaling $500. These deficiencies resulted from unfavorable market fluctuations that occurred shortly after the investment of new contributions for donor-restricted endowment funds and continued appropriation for certain programs that was deemed prudent by the Board of Trustees.
American Institute of CPAs®
Not-for-Profit Section

19. Key Changes in New FASB –
Liquidity & Availability
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Not-for-Profit Section

20. New Required Disclosures - Liquidity
Qualitative information - How a NFP manages its liquid available resources to meet cash needs for general expenditures within 1 year of the balance sheet date (footnotes) –
Descriptive in nature – define timeline to assess its immediate liquidity needs, based upon -
The cash cycle of converting financial assets to cash and payments for payables
Quantitative information - communicates the availability of financial assets at the balance sheet date to meet cash needs for general expenditures within 1 year of the balance sheet date (on the face of the financials and/or in footnotes) 27
American Institute of CPAs®
Not-for-Profit Section

21. Required Disclosure – Qualitative Liquidity
The Organization utilizes a 60-day time horizon to assess its immediate liquidity needs. This period of time was established based on management’s review of the typical life cycle of converting its financial assets to cash and typical payments of its trade payables. The entity invests cash in excess of daily requirements in short-term investments.
Occasionally the Board designates a portion of any operating surplus to its liquidity reserve. As of June 30, 201X, the liquidity reserve was $10,300. This is a governing board-designated fund with the objective of setting funds aside to be drawn upon in the event of financial distress or an immediate liquidity need resulting from events outside the typical life cycle of converting financial assets to cash or settling financial liabilities. In the event of an unanticipated liquidity need, the Organization also could draw upon $40,000 of available lines of credit (as further discussed in Note 8) or the quasi-endowment fund. 27
American Institute of CPAs®
Not-for-Profit Section

22. Quantitative Liquidity Disclosure
Example -
Financial assets at year end
$ ,850,000
Less:
Donor imposed or contractual restrictions making financial assets
unavailable for general expenditure
(475,000)
Quasi - endowment fund, long-term investing
(2,200,000)
Less: amounts set aside for liquidity reserve
(75,000)
Financial assets available within one year to meet cash needs
for general expenditures within one year
$ ,000

23. Key Changes in New FASB ASU –
Expense Reporting
American Institute of CPAs®
Not-for-Profit Section

24. New Requirements for Expenses
Present expenses by function and nature in one location
May be presented in the notes, in the statement of activities, or as a separate statement
Functional expense classifications by their natural expense classifications
Include a description of the method used to allocate costs among program and support functions
Improved guidance about management and general expenses.
American Institute of CPAs®
Not-for-Profit Section

25. Supporting Activities
Expenses - Example
Presentation in notes or separate statement –
Program Services
Supporting Activities
Program 1
Program 2
Subtotal
Mgmt. FR
Total
Salaries & benefits
$ 6,500,000
$ ,000
$ 6,950,000
$ 750,000
$ 225,000
$ ,000
$ 7,925,000
Supplies
450,000
150,000
600,000
74,000
25,000
99,000
699,000
Services
125,000
50,000
175,000
35,000
12,000
47,000
222,000
Professional fees
98,000
15,000
113,000
14,000
4,000
18,000
131,000
Office and occupancy
550,000
675,000
65,000
36,000
101,000
776,000
Depreciation
85,000
535,000
32,000
585,000
Interest
70,000
82,000
6,000
2,000
8,000
90,000
$ 8,243,000
$ ,000
$ 9,130,000
$ 976,000
$ 322,000
$ 1,298,000
$ 10,428,000

26. Expenses – Example
On the Statement of Activities:

27. Functional Expenses Defined
Program Services
Activities that result in goods and services being distributed to beneficiaries, customers, or members that fulfill the purposes or mission for which the NFP exists.
Supporting Activities
Supporting activities are all activities of an NFP other than program services. Generally, they include the following:
Management & general activities
Fundraising activities
American Institute of CPAs®
Not-for-Profit Section

28. Management & General Expenses – Per Guidance
Activities that represent direct conduct or direct supervision of program or other supporting activities require allocation from management and general activities.
Examples:
Information Technology – benefits mostly all – allocate.
CEO or Director – Probably allocate to program, FR, M&G.
CFO – Allocated to M&G and investment expense
HR – Generally assigned to M&G
Grant Accounting & Reporting – Program reports are grant related (program), financial reporting/accounting would be M&G.
American Institute of CPAs®
Not-for-Profit Section

29. Key Changes in New FASB ASU –
Investment Return
American Institute of CPAs®
Not-for-Profit Section

30. Investment Return
Mandatory net presentation of investment expenses against investment return.
Includes both external and direct internal expenses
Removes requirement to disclose the gross investment income and expense (permitted but no longer required)
American Institute of CPAs®
Not-for-Profit Section

31. Defining Internal Investment Expenses
Per standard - Involves the direct conduct or direct supervision of the strategic and tactical activities involved in generating investment return.
Salaries, benefits, travel, and other costs associated with the staff responsible for development and execution of investment strategy.
Allocable costs associated with internal investment management and supervising, selecting, and monitoring of external investment management firms.
Does not include items that are not associated with generating investment return such as costs associated with unitization and other endowment management.
American Institute of CPAs®
Not-for-Profit Section

32. Key Changes in New FASB ASU –
Statement of Cash Flows
Net Assets
American Institute of CPAs®
Not-for-Profit Section

33. Changes to Statement of Cash Flows - Limited
Can continue to use either direct or indirect method
If use direct, no longer required to show indirect reconciliation.
Proposed changes deferred to Phase 2:
Reclassifications between type of activity (Operating, Investing & Financing)
Alignment of Statement of Cash Flows with the Statement of Activities
American Institute of CPAs®
Not-for-Profit Section

34. Transition Guidance
American Institute of CPAs®
Not-for-Profit Section

35. Effective Dates and Transition
Fiscal years beginning after 12/15/2017 (e.g. Calendar year and Fiscal 2018/2019 – June 30, 2019)
Interim financials the following year
Transition:
In year of adoption apply all provisions of the new ASU
For comparative years presented; apply all provisions, except NFP can choose not to present –
Analysis of expenses by nature and function, and/or
Disclosures around liquidity and availability of resources .
American Institute of CPAs®
Not-for-Profit Section

36. Capital University Located in Columbus, OH
Private liberal arts college
Undergraduate, Law school & Seminary
3,200 students
Endowment: $107 million
Budget: $72 million
Why early adoption
Really a trial run - just in case we could not make it work in FY18, FY19 would be a second chance
There was demand for natural classification statements
American Institute of CPAs®
Not-for-Profit Section

37. Planning
Can our current Chart of Accounts support the reporting requirements
American Institute of CPAs®
Not-for-Profit Section

38. Planning… Review Chart with Auditors American Institute of CPAs®
Not-for-Profit Section

39. Fund Each fund has its own restriction
Thus all temporary and permanently restricted funds could be combined into the “With Donor Restriction” Category.

40. Department
1st digit of the department represents the functional classification
1 - Instructional
2 - Academic support
3 - Student services
4 - Institutional Support
5 - Operation and Maintenance
6 - Scholarships (federal & state aid)
8 - Auxiliary

41. Object Heart of natural classification
Never used for external reporting only internal budget reporting
GL-Subclass instrumental in face statement classification

42. Object GL-Subclass instrumental in face statement classification
Determine what expense categories to present on the face financials

43. Breathe a sigh…
Based on this review we concluded we had all the essential elements in our accounts so that no significant changes were needed ahead of full implementation.

44. What if… You funds are not by restriction
Your expense functional classification is not in the department code
Your natural accounts do not exist in your account string?

45. Colleague GLMT Screen

46. How about the Matrix
2 dimensional Matrix of functional and natural classification

47. Matrix… Determine caption for the expense matrix
Translate current NACUBO classification to your caption (in accordance with the ASU)

48. Matrix…detail work Salary and Benefits
Used report writer to summarize by function. Could have used excel also.

49. Matrix…operating & occupancy expenses
Watch for expenses in the wrong functions here

50. Financial Assets and Liquidity

51. Net Assets
Fund balance report incredibly helpful here

52. Net Assets

53. Endowment

54. Surprise…
You are an accountant, a spreadsheet guru, but maybe…not a word processing expert

55. TIPS… Plan early Don’t forget FY18…you can use as your practice year
Review statements from schools who have adopted to plan for your own adoption
Realize expenses may not be classified properly in your GL and will need reclass. E.g your Business office may be paying student health insurance.
Plan allocation bases to use for: IT, public safety, O&M,