H i g h e r E d u c a t i o n

How the new ASU will impact your organization

Christopher J. Niwinski, CPA

smartdevine.com 1

The Financial Accounting Standards Board (FASB) recently issued a proposed Accounting Standards Update (ASU) during July, 2015 intended to improve net asset classification requirements and provide information in the financial statements and note disclosures regarding liquidity, financial performance and cash flows within not-for-profit, inclusive of higher education and healthcare institutions, financial statements and notes to financial statements.

The proposed ASU titled, "Presentation of Financial Statements of Not-for-Profit Entities," sets forth FASB's first suggested improvements to not-for-profit (NFP) reporting rules since 1993, when FASB issued Statement No. 116 and Statement No. 117. The proposed ASU touches on many areas of NFP financial reporting and this paper will explore the ramifications of the impact for Endowment Funds.

Why is FASB Proposing this ASU? Over the last 20 years there were minimal changes to the fundamental reporting model for NFPs. The FASB as well as stakeholders believe it’s time to refresh the model so that NFP financial statements might better communicate their financial performance and condition to their donors, grantors, creditors, and other stakeholders. During that time, NFP organizations developed different methods of reporting their operating results with the goal to convey the connection between financial results and mission execution since existing GAAP does not prescribe a specific way of reporting operating performance.

The relevance of the currently required distinction on the face of the financial statements between permanent and temporary restrictions has become diminished and provides less benefit to third parties. The lack of required information about the liquidity of an organization has contributed to the confusion in determining

whether an NFP is in sound or poor financial condition.

On April 22, 2015, FASB issued an exposure draft titled Proposed Accounting Standards Update (ASU), Not-for-Profit Entities (Topic 958) and Health Care Entities (Topic 954): Presentation of Financial Statements of Not-for-Profit Entities.

In this ASU, FASB is proposing fundamental changes to both the presentation and disclosures in financial statements of not-for-profit organizations. FASB has taken on this project to improve the existing NFP financial reporting model as a part of the response to the call for increased transparency and accountability among NFPs. Simplifying the presentation on the face of financial statements while enhancing disclosures in notes would provide more useful information about an entity’s resources (net assets) and changes in those resources. The goal of this ASU is to improve the usefulness of NFP financial statements by providing better information about a NFP's liquidity, financial performance, and cash flows to the primary users of financial statements, including governing boards, donors, grantors, creditors, and other stakeholders.

Impact by Proposed ASU Implementation of FASB’s new Accounting Standards Update would impact the presentation of the financial information for the:

■ Statement of Financial Position ■ Statement of Activities and Changes in Net

Assets ■ Disclosures within the Notes to Financial

statements All organizations are impacted by this ASU including private colleges and universities, nonprofit health care providers, charities, foundations, etc.).

smartdevine.com 2

Statement of Financial Position Net asset balances for not-for-profit organizations are historically presented on the organization’s balance sheet under three classifications: Unrestricted, Temporarily Restricted and Permanently Restricted Net Assets. Under the new Accounting Standards Update (ASU), FASB’s proposition is to present the net assets on the face of the statement of financial position under two net asset classes (Net Assets with Donor Restrictions and Net Assets without Donor Restrictions), rather than under the currently required three net asset classes.

Statement of Financial Position: Three classifications

For example, a NFP will report amounts for net assets with donor restrictions and net assets without donor restrictions rather than in the three classes referred to above. By eliminating this distinction through the consolidation of these respective fund balances into net assets with restrictions on the Statement of Financial Position and Statement of Activities within the financial statements will clearly articulate the composition of net assets and whether they are currently available to support an NFP's mission (Board Designated) or whether certain restrictive conditions need to be met before utilizing them in this manner (Donor Restricted).

The additional disclosure will also focus on when and in what manner the net assets are to be used versus the specific distinctions between the temporary and permanent restrictions. Not-for-profit organizations would

smartdevine.com 3

also be required to provide clarity as to the purposes and amounts of board designated net assets, not bearing any donor restrictions. This disclosure will provide additional clarity as to the availability and use of funds to support the current operations versus amounts to fund future initiatives.

Statement of Activities and Changes in Net Assets Through this ASU, FASB addresses the definition and presentation of a measure of operations, which will push down changes to the respective Statement of Activities. As a result of this migration from three net asset classes to two, the presentation of changes in the net assets on the statement of activities will have to follow suit:

■ Presentation of net assets will be under two classifications vs. three;

■ Disclosure information will focus more on the nature and timing of the spending of the net assets.

Additionally, in attempts to better reflect financial performance in the statement of activities, income will be reported as a measure of operations, which will clearly present the amounts available and used for current operations versus those held for long-term purposes, either through donor restriction, board designation or other circumstances.

The two measures are described is the following chart:

Financial Performance: Operating Measures

Defined required operating measures for all NFPs will be based on two dimensions

Mission (Business and Charitable Activity)

■ Based on whether resources are from or directed at carrying out an NFP’s purpose for existence versus investing and financing.

■ Will include contributions, income from the sale of goods/services and royalties tied to the use of the NFP’s name.

Availability

Based on whether resources are available for current period activities and reflecting limits imposed by:

■ External donors;

■ Internal actions of NFP’s governing board.

smartdevine.com 4

As part of FASB’s proposed ASU, NFP would also be required to disclose the original gift amounts for donated funds that are considered “underwater” (carrying value is less than donated amount) and any related governing board spending policies. The amount by which the endowment is underwater will be reported in the net assets with donor restrictions rather than in the current unrestricted net asset category.

Footnote Disclosure The proposed ASU also supports increased disclosures within the notes to financial statements. The endowment reporting disclosures will provide useful information about the nature, amounts, and effects of the various types of donor-imposed restrictions including:

■ Nature of the endowment and the restrictions regarding the use of the resources’ balance;

■ The nature of intent for managing net asset liquidity risks;

■ Restrictions regarding the time frame for use of funds;

■ The original gift amount related to the “Underwater” endowments

How do we prepare for this new ASU? Although FASB has not proposed an effective date for this ASU, it is never too early to start the education and preparation process. Proper management of your organization’s endowment funds is integral towards your organization’s survival and will set the “financial stage” on how and to what capacity your NFP’s mission will be met year after year.

Board members, CFO’s, Controllers, and Development Directors can utilize this opportunity

to challenge their organization’s current net endowment environment by asking:

■ If the organization resides in Pennsylvania, is the accounting treatment of endowments properly following guidance documented in the Commonwealth of Pennsylvania Act 141?

■ If the organization resides outside Pennsylvania, is the accounting treatment of endowments properly following guidance documented in the Uniform Prudent Management of Institutional Funds Act?

■ Are the endowment funds being accounted for properly?

■ Are all gifts with a purpose restricted by external donors included in Net Assets with Donor Restrictions? Board Designated, included in Net Assets without Donor Restrictions?

■ Is income from endowments accounted for in the appropriate operating measure?

■ Are Net Assets released from Restrictions present properly within the financial statements?

■ Are the endowment funds principal and income being utilized in accordance with the NFPs spending policy?

■ Are the endowment funds principal and income being utilized to best benefit the organization?

■ What is the best communication initiative to the fundraising community?

These are all important questions to ask to determine if you are ready to follow FASB’s new guidance and assess the length of time it will take to implement the new guidelines. Proactively assessing your organization’s readiness to move forward in this regard looks to be a great start!

smartdevine.com 5

About the Author Christopher Niwinski, CPA Director Christopher is a Director with Smart Devine and has over 20 years of consulting experience with clients in the higher education, healthcare, and not-for-profit industries. His experience includes providing interim financial and operational management to higher education facilities, hospitals, non-profit organizations, and health systems as well as internal audits, control risk assessments, process review and remediation implementation, and a deep understanding of the financial processes of entities within the non-profit industry.

Chris is a member of the American Institute of Certified Public Accountants, Pennsylvania Institute of Certified Public Accountants, and a member of the Board of Directors with Healthcare Financial Management Association and the LaSalle University Alumni Association.

For more information contact Chris at 267.670.7345 or email at cniwinski@smartdevine.com.

Additional Services

Higher Ed Administration Higher Ed Student Services Reporting ■ Project Management Office (PMO) ■ Business Process Assessments ■ Strategic Organization Planning ■ Grant Management ■ Internal Control Assessments ■ Financial Reconciliation and

Remediation ■ Revenue Management and

Compliance ■ Strategic Sourcing

■ Student Records and Registration–Academic and Continuing Education

■ Accounts Receivable and Bursar Operations

■ Recruiting and Admissions ■ Financial Aid System and Process

Support ■ Institutional Research ■ Housing and Judicial Management

■ Business Intelligence & Decision Support

■ Reporting Strategy and Improvements

■ Analytics and Performance Reporting

■ Leadership Dashboard Development

■ Report Integration with Compliance ■ Requirements such as IPEDS and

FERPA Finance, Tax and Accounting Information Technology Litigation and Forensics

■ GAAP Audits, A-133 Audits ■ Tax – Form 990, State and Local,

UBIT, Financial Aid ■ Internal Audit ■ Accounting Operations ■ Budgeting ■ Accounting Outsourcing ■ Sponsored Program Compliance ■ Endowment Spend & Analysis ■ Financial Risk Assessment ■

■ Assessment and Selection of Technologies

■ Conversions and Upgrades ■ Systems Optimization ■ Database Administration ■ Systems Integration and Interfaces ■ Enterprise Software Implementation ■ IT Strategy ■ Packaged Software Enhancements

■ Internal Investigations ■ Forensic Accounting ■ Fraud/Billing Issues ■ Expert Witness Testimony ■ False Billing Schemes ■ Financial Statement Fraud ■ Digital Forensics/e-Discovery ■ Electronic Data Recovery

SMART DEVINE | 1600 MARKET STREET, 32ND FLOOR | PHILADELPHIA, PA 19103 | 267.670.7300

Christopher Niwinski, CPA