A Deeper Dive Into ASU 2016-14 Implementation Issues

Three of the nonprofit financial reporting areas–investment expenses, liquidity and availability disclosures and internal net asset designations–that will be impacted by the Financial Accounting Standards Board (FASB) ASU 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities are highlighted in this blog.  

As organizations look to implement ASU 2014-16 and meet its requirements, they must account for how these changes may impact how they collect information.
 

1. Investment Expenses

The ASU now requires the netting of internal and external investment expenses against investment return. In addition, only the net amount of the investment return related to total return investing is required to be presented in the statement of activities. Programmatic investing, or any financial activity that directly carries out a nonprofit’s mission or purpose, such as a loan made to lower-income individuals to promote home ownership is not included in this net presentation.
 
To comply with this presentation, organizations need to fully understand the definitions of these terms and then consider how to appropriately and accurately capture this information.
 
External Investment Expenses
External investment expenses are those that are reported to the organization by external money managers and other external investment management firms related to the management of the investment portfolio. This information will be obtained from the external investment firms based on what they charged.

Direct Internal Investment Expenses
Direct internal investment expenses are defined in the ASU as those that involve the direct conduct or supervision of the strategic and tactical activities involved in generating investment return. These include, but are not limited to:
  • Salaries, benefits, travel and other costs associated with the officer and staff responsible for the development and execution of investment strategy, and
  • Allocable costs associated with internal investment management and supervising, selecting and monitoring of external investment management firms.
Excluded Items
Items not associated with generating investment return are not considered direct internal investment expenses and should be excluded. An example of excluded items is:
  • Accounting staff costs associated with reconciling accounts, recording transactions, maintaining the unitization of pooled investment accounts and other such clerical staff time.
Impact to Nonprofit Organizations
Accounting for investment expenses and the related allocation of costs is a process that organizations will have to develop to properly present these investment costs under the provisions of the ASU. The complexity will depend on the type of organization and the amount and nature of their investments.
 
For example, the management of a large foundation that handles the strategic aspects of investing their assets internally must analyze and establish an allocation methodology for the salaries, benefits and travel related to the total return investing. Entities will need to identify all personnel who participate in the investment process and determine whether they have a strategic role. In addition, entities may need to develop a process and make modifications to timesheets or other tracking methodologies to capture the time spent aiding the identification and allocation of these costs.


2. Liquidity and Availability Disclosures

Under the ASU, specific quantitative and qualitative information related to the new liquidity and availability requirements must be disclosed.

To fulfill quantitative requirements, organizations should:
  • Assess how they manage their liquid resources to ensure they can meet their cash needs for general expenditures as of and within one year, respectively, of the statement of financial position date;
  • Evaluate their financial assets to determine their availability to meet cash needs;
  • Consider the nature of the assets;
  • Examine the external limits imposed by donors, laws and contracts; and
  • Account for, analyze and track any internal limits imposed by governing board decisions.
Organizations need to identify and evaluate qualitative issues, including:
  • Special borrowing arrangements or instances whereby the entity has not maintained appropriate amounts of cash as required by donor-imposed restrictions; and
  • Limitations that result from contractual agreements with suppliers, creditors, loan covenants and other sources.


3. Internal Net Asset Designations

Under ASU 2016-14, the accounting treatment for internally designated net assets hasn’t changed, but the presentation of these amounts and the disclosures have. These changes require entities to properly track these amounts and their related purpose so they can meet the ASU’s disclosure requirements.

Organizations should review the ASU now and take these items and others into consideration when developing their implementation plan. Though nonprofits are not required to implement the ASU until calendar year 2018 or fiscal year 2019 year ends, preparation takes careful planning, so organizations would be well advised to begin the process as soon as possible.
 
In addition to the three changes discussed in this blog, ASU 2016-14 also impacts the presentation of net asset classes, expenses and operating cash flows and enhances various disclosures. We’ll be covering how these reporting areas will be impacted by the ASU in a future blog post.

For more information, refer to our Nonprofit Financial Reporting Resource Center or contact Tammy Ricciardella, Director, at tricciardella@bdo.com.

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