net asset classification – why is it important?
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Net Asset Classification – Why Is It Important?. Vicki VandenBerg, CPA Partner Keith Martinez, CPA Associate Plante Moran December 13, 2011. Agenda. Increased scrutiny Reliance on net assets Common errors Classification – FASB Classification – GASB Case studies - PowerPoint PPT PresentationTRANSCRIPT
VICKI VANDENBERG, CPAPARTNER
KEITH MARTINEZ, CPAASSOCIATE
PLANTE MORAN
DECEMBER 13 , 2011
Net Asset Classification – Why Is It Important?
Agenda
Increased scrutinyReliance on net assetsCommon errorsClassification – FASBClassification – GASBCase studiesMeaning to the reader of the statementsHow to handle an error
Recent Public Scrutiny
Ohio Senate Finance Chairman Chris Widener
$8B state budget deficit$3B in combined reserves for Ohio public
colleges and universitiesRequest for tuition increasesShared concern with university presidents
and financial officers
Reliance on Net Asset Reporting
Boards are approving recommendations of management
Governance may not understand the different net asset categories
Board designated reserves versus unrestricted net assets
Common Mistakes
Presentation of board designated net assetsTreatment of appreciation/depreciation in
endowment investmentsUnspent bond proceedsUndistributed earnings on endowment fundsClassification of temporarily restricted or
expendable net assets
Net Asset Classification - FASB
Section 958-210-20 - provides definition of net asset categories
Section 958-210-45-9 – describes classification of net assets
Section 958-210-55 – provides format of net asset section
Net Asset Classifications – FASB cont.
Temporarily Restricted Net assets resulting from contributions or other
inflows with donor-imposed stipulations that expire by the passage of time or specified use of the funds
Usually restricted fund, part of the endowment fund, portion of the plant and student loan fund is closed into temporarily restricted
Net Asset Classifications – FASB cont.
Permanently Restricted Net assets resulting from contributions or other
inflows with donor-imposed stipulations for the funds to be held in perpetuity
Even though the fund is permanently restricted, the earnings could be unrestricted depending on the details of the restriction imposed
Corpus of the endowment fund and part of the student loan fund is classified in permanently restricted
Net Asset Classifications – FASB cont.
Unrestricted Net assets that are neither temporarily or
permanently restricted by donor-imposed stipulations Generally result from revenues from providing
services, unrestricted contributions, and dividends or interest less expenses incurred providing services, raising contributions and performing administrative functions
Usually general, auxiliary and most of the plant fund is closed into unrestricted
Net Asset Classification – FASB cont.
Based on the existence or absence of donor-imposed restrictions
Amount of each class must be reported on the face of the statement
Nature and amounts of each type (temporarily, permanently) reported on the face or in the notes
Designations of net assets can be disclosed on the face of the statements and are classified under unrestricted net assets
Net Asset Classification - GASB
GASB Statement No. 34, paragraphs 32-37GASB Comprehensive Implementation Guide,
Chapter 7
Net Asset Classification – GASB cont.
Net assets should be presented in three componentsInvested in capital assets, net of related debtRestrictedUnrestricted
Net Asset Classifications – GASB cont.
Invested in Capital Assets – net of related debt Represents the balance of net assets that are invested
in property and equipment Includes restricted capital assets Capital Assets less long term debt plus bond issuance
costs plus unspent bond proceeds
Net Asset Classifications – GASB cont.
Restricted Net Assets Externally imposed by creditors, grantors,
contributors Imposed by law through constitutional provision or
enabling legislation Must distinguish between expendable and
nonexpendable
Net Asset Classifications – GASB cont.
Restricted – Expendable Similar to temporarily restricted (FASB) Restricted by a third party for a specific use Examples include unspent grants and contributions
Restricted – Nonexpendable Similar to permanently restricted (FASB) Required to be retained in perpetuity Endowment corpus
Net Asset Classification – GASB cont.
Unrestricted Net Assets Consist of net assets that do not meet the definition of
the other two categories No restrictions are imposed Includes designated
Net Asset Classification – GASB cont.
Designations of net assets cannot be disclosed on the face of the statements Should not be reported on the face of the statements Include in MD&A or footnotes
Net Asset Case Study #1
Board approved transferring surplus over $100,000 from general fund to endowment fund
How do you report?
Answer: The $100,000 is considered part of board designated
net assets – if GASB can report in footnotes or MD&A, if FASB, can show as a component of unrestricted
Net Asset Case Study #2
A portion of the endowment fund is considered quasi-endowed due to no donor restriction – where are earnings reported?
Answer: The earnings are reported as unrestricted. Further
analysis should be done to determine if they should also be considered board designated
Net Asset Case Study #3a
An endowment fund was underwater in prior year by $50,000. This year the unrealized gains on the fund are $75,000 – how do you report the current year gain (FASB example)?
Answer: $50,000 of the unrealized gains are reported as
unrestricted since the under water is to be repaid. The remaining $25,000 is reported as temporarily restricted until appropriated for expenditure in accordance with terms of the endowment fund.
Net Asset Case Study #3b
An endowment fund was underwater in prior year by $50,000. This year the unrealized gains on the fund are $75,000 – how do you report the current year gain (GASB example)?
Answer: $50,000 of the unrealized gains are reported as a
recapture of nonexpendable since the under water is to be repaid. The remaining $25,000 is reported as expendable until appropriated for expenditure in accordance with terms of the endowment fund.
Net Asset Case Study #4
In accordance with a donor endowment challenge for every dollar contributed up to $5,000 the Board will match the endowment gift. How do you report the match (FASB)?
Answer: If a donor contributes to an endowment fund by
contributing $5,000 those earnings are reported as permanently restricted contributions. The Board approved match is recorded as a net asset transfer moving from unrestricted to permanently restricted.
Net Asset Case Study #5
Recognition of increase in market value on University endowment fund, where reported?
Answer: The increase in market value is treated similar to
interest and dividends and is reported as restricted expendable absent any donor restrictions.
Net Asset Case Study #6
Market value of endowment fund falls below value of original gift, where is the unrealized loss reported?
Answer: GASB - The unrealized loss should be recorded
against restricted expendable however, a deficit in restricted net assets can not be shown (excess would go against restricted - nonexpendable)
FASB – The unrealized loss should be recorded against restricted however, a deficit in restricted net assets can not be shown (excess would go against unrestricted)
What does it mean to the reader of the FS?
Provides the financial statement reader with…What assets have external purpose
restrictionsWhat assets are spoken for (designated)What assets are available for use
How to Handle an Error?
Depends on the nature of the error Between restricted and unrestricted Between restricted expendable and nonexpendable
Depends on materiality Percentage of total assets Percentage of net assets Percentage of total revenue
How to Handle an Error?
Financial statement treatmentAdjust the current year presentationPrior period adjustmentClassification of error/findingControl deficiencySignificant deficiencyMaterial weakness
