Accounting for Endowments: What You Need to Know - BKD
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
2/11/2019
Accounting for
Endowments: What
You Need to Know
February 12, 2019
To Receive CPE Credit
• Individuals
• Participate in entire webinar
• Answer polls when they are provided
• Groups
• Group leader is the person who registered & logged on to the webinar
• Answer polls when they are provided
• Complete group attendance form
• Group leader sign bottom of form
• Submit group attendance form to training@bkd.com within 24 hours of webinar
• If all eligibility requirements are met, each participant will be emailed their CPE certificate
within 15 business days of webinar
22/11/2019
Presenters
Neely Duncan Sara Grenier
Partner Director
ndduncan@bkd.com sgrenier@bkd.com
Emily George
Danika Mendrygal
Senior Managing
Attorney
Consultant danika@mendrygallaw.com
egeorge@bkd.com
Today’s Topics
Understanding NFP Reporting Standard
Endowments Impact on Endowments &
Investments
Endowment Risk Investments
Management & Legal
Structure
Endowment Policy Financial Statements from ASU
Considerations 2016-14: Statement of Financial
Position
42/11/2019
Today’s Topics
Financial Statements from ASU Board & Management Designations/
2016-14: Statement of Activities Appropriations & Enhanced
& Changes in Net Assets Disclosure Requirements
Endowment Disclosure Net Asset Requirements for
Requirements Presentation & Enhanced
Disclosure Requirements
Underwater Endowment Fund Liquidity Disclosure Requirements
Changes
5
Understanding
Endowments2/11/2019
Common Myth:
Accountants & lawyers speak
the same language
7
General Types of Endowments
› Perpetual type of endowment
› Term endowment
› Quasi-endowment – Board-designated endowments
› Board-designated (reserves, rainy day funds, capital campaigns)
• These are NOT endowments, they are different
• Therefore, NOT included in the enhanced endowment disclosures
• But, they are required to be considered for the impact to liquidity
82/11/2019
UPMIFA Legal Definition (As Adopted
by Texas) – Endowment Fund
› “Institutional fund” – a fund held by an institution exclusively for charitable purposes
› “Institution” includes
• A person (other than an individual) organized & operated exclusively for charitable purposes
• A government or governmental subdivision, agency or instrumentality, to the extent it holds funds
exclusively for charitable purposes
• A trust that had both charitable & noncharitable interests, after all noncharitable interests have
expired
› “Endowment fund” – an institutional fund (or part thereof) that, under the terms of a gift instrument, is
not wholly expendable by the institution on a current basis
• Does not include board-designated endowments since there is no gift instrument
9
Investment Management Code of
Conduct (CFA Institute)
› Act with loyalty & proper purpose
› Act with skill, competence, prudence & reasonable care
› Abide by all laws, rules, regulations & founding documents
› Show respect for all stakeholders
› Review investment strategy & practices regularly
102/11/2019
Endowment Risk
Management &
Legal Structure
Endowment Risk Management
› Endowments impose upon the organization
• Contractual
• Legal
• Ethical
• Financial
• Management
• Reporting responsibilities
122/11/2019
Regulatory/Legal Framework –
Restricted Gifts
› General Tips
• New endowment set up
• Structure & options for endowments
• Hurdles & leadership decision making
13
Endowment Structure
› Structural options
• Separate 501(c)(3)
› “Stand-alone” public charity
› Private foundation
› Supporting organization
› Legal & governance implications of structure
› Other implications of structure
› Related considerations
• Control by operating nonprofit
142/11/2019
What Can Go Wrong?
› Reputational risk › Donor default on payment
› Donor relations › Restrictions or requirements the
charity cannot handle
› Change in culture or values › Lack of clarity around provisions
over time
› State regulatory enforcement
› Change in circumstances
› Private donor enforcement (or
› Conflicts of interest attempts)
› Donor actions/reputation › Charitable pledges
15
Regulatory/Legal Framework –
Restricted Gifts
Federal/IRS State
• Completed gift • Donor intent
• Charitable deduction/Quid pro quo rules • UPMIFA
• Conditional “get it back” restrictions • Attorney General/Charities Bureau
• Impact on 501(c)(3) status/Private • Other issues
benefit • Private litigation
• Private foundation rules, i.e., self-
dealing
162/11/2019
Education/Training Issues
› Acceptance – when & how › Checklists for potential issues
› Applicable approval thresholds › Consider print & online
› Importance of record-keeping solicitations also
› Documenting conversations › Periodic review & revisit
regarding intent, restrictions & existing restrictions
conditions
› Internal tracking of
› Guidelines for communications spending/investments
with donors
17
Endowment Policy
Considerations2/11/2019
Endowment Fund Policy
› Policy of the management of endowments
• Philosophy & attitude
• Delegation of authority considerations
• Fiduciary responsibilities – board, committees, reporting
• Objectives related to growth, targets, goals & benchmarks
• Allowable investments, asset allocation
• Clarity of fund restrictions & interpretations
• Periodic reviews & updates of the policy
19
Fiduciary Responsibility & Delegation of
Authority Policy Considerations
› What documents govern activities?
• Charter
• Bylaws
• Laws
• Trust documents
› What governing body is tasked with managing the endowment?
• Board of separate 501(c)(3)
• Finance & investment committee
• Executive committee
• Development & public relations committee
› Outsourced
Any person serving on the governing committee has a fiduciary responsibility under UPMIFA
202/11/2019
Gift Acceptance Policy
› Mission requirement
› Types of gifts (liquid, real estate, land, partnerships, alternative investments)
› Restrictions to programs/campaigns
› Administration fees
› Credit risk of the donor
› Donor advised funds
› Delegation of Authority
21
Gift Instruments – UPMIFA
› Donor gift document in whatever form available
› Expansive definition
› Can include
• Electronic writing
• Will, deed, grant or conveyance
• Agreement or memorandum
• Articles/Certificate or bylaws (where gift is made for general purposes)
• Minutes of meetings
• Canceled checks
• Institutional solicitation (where gift is made in response)
222/11/2019 Investment Policies › Business plan of the ENTIRE investment portfolio › Reassures potential donors of investment stewardship › Required by UPMIFA › Sets the risk tolerance › Fiduciary responsibility of the board › Necessary for GAAP-required disclosures › Financial advisors/investment managers 23 Spending Distribution Policies › Donor always rules! › Parameters › Mission › Communicates the prudent distribution method › Sets parameters for spending patterns & distribution uses › Frequency, percentages & disbursements are made in accordance with the spending policy › Prevents excessive distributions, promotes good stewardship › Fiduciary liability required by UPMIFA 24
2/11/2019
UPMIFA – General Approach
› UPMIFA takes a two-tier approach – its provisions apply to “Institutional
Funds” (the duties & factors related to management & investment) & a
portion (the expenditure/appropriation/spending rules) only apply to
“Endowment Funds”
› So, whether (& how) UPMIFA applies to you depends on whether you
have an institutional fund or endowment fund
› UPMIFA potentially applies to all charitable entities regardless of form,
e.g., nonprofit corporations, nonprofit associations, limited liability
companies, trusts
25
UPMIFA Presumption of Imprudence
› Common misconception that this is a safe harbor, particularly because UMIFA gave us a
bright line rule
› Applies to expenditures from TUPMIFA endowment funds, but not to institutional funds
› If spending from endowment fund exceeds thresholds
• Funds > $1MM – presumption at 7% FMV
› University systems > $450MM – 9% FMV
• Funds < $1MM – presumption at 5% FMV
› FMV determined quarterly & averaged over a 3-year period (or if in existence less than 3
years, for the period since inception)
› Presumption is rebuttable if facts & circumstances dictate that expenditure from
the endowment fund was prudent (for example, a fund for a major construction
project may have no expenditures for 3 years & then spend 20% in year 4)
262/11/2019
UPMIFA Protections & Duties
› Delegation of Management & Investment Functions
› Duty of Loyalty
› Duty of Care
› Duty to Diversity
› Duty to Manage Costs & Verify Facts
27
Modification & Release – UPMIFA
› Permits release or modification of restrictions by donor, charity or court in specific
instances
› Small/Old Funds – if restriction is unlawful, impracticable, impossible to achieve
or wasteful, an institution may release or modify a restriction without donor
consent or court approval if all of these conditions are met
• Institutional fund < $25,000
• Institutional fund is more than 20 years old
• Will be used consistent with charitable purposes
• Requires Attorney General notice
› Example – $15,000 fund set up in 1973 for the cure of polio – with AG notice, can
release restriction & use for a purpose consistent with original purpose, i.e., cure
of other children’s diseases
282/11/2019
Modification of Restrictions –
Outside of UPMIFA
› What if the UPMIFA modification provisions don’t apply?
› Does the gift agreement address?
› Can donor consent?
› Court Action
› Attorney General Approval
29
NFP Reporting
Standard Impact on
Endowments &
Investments2/11/2019
Effective Date: ASU 2016-14, Not-for-Profit
Entities (Topic 958) – Presentation of Financial
Statements of NFP Entities
› Effective for financial statements for fiscal years beginning after
December 15, 2017, & for interim periods within fiscal years
beginning after December 15, 2018
› Consideration of single year financial statements
› Fee increases & expectations
31
Investments2/11/2019
ASU 2016-14: Investments
› Report investment return net of external & direct internal investment expenses
& no longer require disclosure of those netted expenses.
› Direct internal investment expenses involve the direct conduct or direct
supervision of the strategic & tactical activities involved in generating
investment return. These include, but are not limited to, both of the following
• Salaries, benefits, travel & other costs associated with the officer & staff responsible for the
development & execution of investment strategy.
• Allocable costs associated with internal investment management & supervising, selecting
& monitoring of external investment management firms.
• Direct internal investment expenses do not include items that are not associated with
generating investment return. For example, the costs associated with unitization & other
such aspects of endowment management would not be allocated.
33
Expenses Versus Losses
› Expenses are outflows of assets or incurrences of liabilities that
result from an NFP's ongoing major or central operations &
activities
› Losses are decreases in net assets from an NFP's peripheral or
incidental transactions & other events & circumstances affecting
the NFP other than those that result from expenses
› Gains & losses result from holding assets or liabilities while their
values change
342/11/2019
Expenses Versus Losses
› No requirement to report losses by functional category
› Examples of losses
• Bad debt – can be either expense or loss
• Impairment of long-lived assets
• Change in market value of investments
• Foreign exchange rates
• Natural catastrophes
• Sell of building & equipment
• Winning/losing a lawsuit
35
UPMIFA Factors to Consider for
Investments
› General economic condition
› The possible effect of inflation or deflation
› The expected tax consequences, if any, of investment decisions or strategies
› The role that each investment or course of action plays within the overall investment
portfolio of the fund
› The expected total return from income & the appreciation of investments
› Other resources of the institution
› The need of the institution & of the fund to make distributions & preserve capital
› An asset’s special relationship or special value, if any, to the charitable purposes of the
institution
362/11/2019
Investment Policies Disclosures
› Requirement
• A description of the NFP’s endowment investment policies, including all
of the following
› Return objectives & risk parameters
› How return objectives relate to the NFP’s endowment spending policy (often
included in the spending policy)
› The strategies employed for achieving return objectives
37
Investment Policy Example
Return Objectives and Risk Parameters - The School has adopted investment and spending policies for endowment assets
that attempt to provide a predictable stream of funding to programs supported by its endowments while seeking to maintain the
purchasing power of the endowment assets. Endowment assets include those assets of donor-restricted funds that the school
must hold in perpetuity or for donor-specified periods as well as board-designated funds. Under this policy, as approved by the
Board of Trustees, the endowment assets are invested in a manner that is intended to produce results so that the endowment
investments are in the top quartile of any distribution of competitors’ performance over rolling five-year or ten-year periods. The
School expects its endowment funds, over time, to increase faster than the rate of inflation. Actual returns in any given year may
vary.
Strategies Employed for Achieving Objectives - To satisfy its long-term rate-of-return objectives, the School relies on a total
return strategy in which investment returns are achieved through both capital appreciation, realized and unrealized, and current
yield, such as interest and dividends. The School targets a diversified asset allocation that has a long-term target of 60%
equities, 20% inflation protection, and 20% fixed income to achieve its long-term return objectives within prudent risk constraints.
382/11/2019
Investment Policy Example
Return Objectives and Risk Parameters - The Foundation has adopted investment and spending policies for
endowment assets that attempt to provide a predictable stream of funding to programs supported by its endowment
while seeking to maintain the purchasing power of the endowment assets. Under this policy, as approved by the
Foundation’s Board of Directors, the endowment assets are invested in a manner that is intended to achieve a
cumulative real rate of return (nominal return less the Consumer Price Index) of between 1% and 2.5% compounded
annually for a moving five-year period. Actual returns in any given year may vary from this amount.
Strategies Employed for Achieving Objectives - To satisfy its long-term rate-of-return objectives, the Foundation relies
on a total return strategy in which investment returns are achieved through both capital appreciation, realized and
unrealized, and current yield such as interest and dividends. The Foundation targets a diversified asset allocation that
places a greater emphasis on equity-based investments to achieve its long-term return objectives within prudent risk
constraints.
39
Example Disclosure –
Investment/Spending
› Laws & regulations allow the governing board to appropriate so much of an
endowment fund as is prudent considering the following relevant factors: the
duration & preservation of the endowment fund, the purposes of Not-for-Profit
Entity A & the endowment fund, general economic conditions, the possible effect
of inflation or deflation, the expected total return from income & the appreciation
of investments, Not-for-Profit Entity A’s other resources & Not-for-Profit Entity A’s
investment policy
› Under Not-for-Profit Entity A’s endowment spending policy, 5% of the average of
the fair value at the end of the previous three years is appropriated, which was
$7,500 for the year ended June 30, 20X1
402/11/2019 Spending Policy Examples The School has a policy of appropriating for distribution each year four to five percent of its endowment assets’ average fair value over the prior 12 quarters through the fiscal year- end preceding the fiscal year in which the distribution is planned. This is consistent with the School's objective to maintain the purchasing power of the endowment assets held in perpetuity or for a specified term as well as to provide additional real growth through new gifts and investment return. 41 Spending Policy Examples The Alliance has a policy of appropriating for distribution each year an amount appropriate to the various endowments. The distribution rate, expressed as a percentage of market value of the endowment investments, is determined on a year-to-year basis by the Executive Committee upon recommendation of the Finance and Audit Committee of the Board. In light of current market conditions, the Alliance does not expect to make distributions from the earnings of permanently restricted endowment funds in the next fiscal year. 42
2/11/2019 Spending Policy Examples The XXX has a spending policy to distribute from the Endowment Fund annually no more than four percent (4%) of the average of the fair market value of the Endowment Fund on June 30 of the current year and the immediate two prior years. In the event of exceptional growth in the Endowment Fund, the Finance Committee and Endowment Committee may consider additional distributions, subject to approval of the Board of Trustees. 43 Spending Policy Examples The XXX Garden Endowment is a permanently restricted endowment fund with a donor- imposed spending policy that overrides the general spending policy of the Foundation. The donor has specified an annual spending rate of 4% which is to be followed even if it should result in some use of principal. 44
2/11/2019
Financial Statements
from ASU 2016-14:
Statement of
Financial Position
NFP – Statement of Financial Position
Previous Presentation: Net Assets
NET ASSETS
Unrestricted
Board-designated operating reserve 3,158,984
Board-designated strategic growth reserve 11,400,000
Property & equipment 9,286,537 Previous classifications
Other 8,293,744
Total unrestricted 32,139,265
Temporarily restricted 2,926,049
Permanently restricted 1,409,634
Total net assets 36,474,948
$
Total liabilities & net assets 36,636,280
462/11/2019
NFP – Statement of Financial Position ASU
2016-14 Presentation: Net Assets
NET ASSETS
Without donor restrictions
Board-designated operating reserve 3,158,984 Note: NFP does not have
any quasi-endowments
Board-designated strategic growth reserve 11,400,000
Undesignated 17,580,281
Total without donor restrictions 32,139,265
With donor restrictions 4,335,683
Total net assets 36,474,948
Classification in ASU 2016-14
Total liabilities & net assets $ 36,636,280
47
Financial Statements
from ASU 2016-14:
Statement of
Activities & Changes
in Net Assets2/11/2019
NFP – Statement of Activities ASU 2016-
14 Presentation: Revenues
Without Donor With Donor
Two
Restrictions Restrictions Total
classifications
REVENUES, GAINS & OTHER SUPPORT
$ $
Contributions $ 4,235,098 15,000 4,250,098
In-kind contributions 74,837 - 74,837 Determination of without
donor restrictions remains
Government grants 2,692,546 - 2,692,546 unchanged from previous
Special events, net of cost of direct benefit to “unrestricted” classification
donors of $608,853
2,106,429 - 2,106,429
Investment return, net 292,667 167,426 460,093
Miscellaneous income
11,731 - 11,731
Determined by adding
Net assets released from restriction
1,215,402 (1,215,402) - previously classified temporarily
restricted & permanently
Total revenues, gains & other support
10,629,610 (1,032,976) 9,596,634 restricted together
49
NFP – Statement of Activities ASU 2016-14
Presentation: Expenses & Changes in Net Assets –
Revised from Allocations Without Donor With Donor
Restrictions Restrictions Total
EXPENSES Identification of major
programs on the face of the
Program A 4,984,948 - 4,984,948
statement of activities
Program B - - -
Program C - - -
General & administrative 484,519 - 484,519
Fundraising 527,367 - 527,367 Assumes that the entity has
no losses
Total expenses 5,996,834 - 5,996,834
Remains unchanged
CHANGES IN NET ASSETS 4,632,776 (1,032,976) 3,599,800
Expense totals change to
reflect presentation of
investment return, net &
NET ASSETS AT BEGINNING OF YEAR 27,506,489 5,368,659 32,875,148
change based on functional
NET ASSETS AT END OF YEAR $ 32,139,265 $ 4,335,683 $ 36,474,948 analysis
502/11/2019
Endowment
Disclosure
Requirements
Disclosure Requirements
› An NFP shall disclose information to enable users of financial
statements to understand all of the following about its endowment
funds (both donor-restricted & board-designated)
• A description of the governing board’s interpretation of the law or laws
that underlie the NFP’s net asset classification of donor-restricted
endowment funds
• Net asset classification
• Net asset composition
• Changes in net asset composition
522/11/2019
Disclosure Requirements
› An NFP shall disclose information to enable users of financial
statements to understand all of the following about its endowment
funds (both donor-restricted & board-designated)
• A description of the NFP’s policy or policies for the appropriation of endowment
assets for expenditure (its endowment spending policy or policies)
• Related investment policies
• Disclosure of aggregate deficiencies of all donor-restricted endowment funds.
Therefore, if one endowment has unrealized gains while another has unrealized
losses, the not-for-profit organization should account for each donor-restricted
endowment fund individually rather than netting the gains of one
endowment fund with the losses of another endowment
53
Endowments Disclosure
New disclosure format
Changes in endowment net assets are as follows
Without Donor With Donor
Restrictions Restrictions Total
Endowment net assets at beginning of year $ - $ 2,021,145 $ 2,021,145
Investment return, net - 9,550 9,550
Contributions - 125,000 125,000
Annual adjustment to corpus for inflation - - -
Appropriation of endowment assets
for expenditure - (91,115) (91,115)
Endowment net assets at end of year $ - $ 2,064,580 $ 2,064,580
542/11/2019
Example Disclosure – Endowment Funds
Endowment net assets composition by type of fund as of June 30, 20XX
55
Example Disclosure – Endowment Funds
Changes in endowment net assets for the fiscal year ended June 30, 20XX
562/11/2019
Introduction to the Note
Example:
The School’s endowments consist of approximately 155 funds established for a variety of purposes. Its
endowments include both donor-restricted endowment funds and funds designated by the Board of Trustees to
function as endowments (quasi-endowments). As required by GAAP, net assets associated with endowment
funds, including quasi-endowments, are classified and reported based on the existence or absence of donor-
imposed restrictions. The School manages its endowments on a pooled basis, under the direction of the Assets
Management Committee, and earnings on the pooled investments are allocated on a pro rata basis to each of the
funds.
57
Description of Law
Example:
Interpretation of Relevant Law - The Board of Trustees of the School has interpreted the Uniform Prudent Management of Institutional Funds Act (UPMIFA)
as requiring the preservation of the fair value of the original gift as of the gift date of the donor-restricted endowment funds absent explicit donor stipulations to
the contrary. As a result of this interpretation, the School classifies as permanently restricted net assets (a) the original value of gifts donated to the permanent
endowment, and (b) the original value of subsequent gifts to the permanent endowment.
The remaining portion of the donor-restricted endowment fund that is not classified in permanently restricted net assets is classified as temporarily restricted net
assets until those amounts are appropriated for expenditure by the School in a manner consistent with the standard of prudence prescribed by UPMIFA.
In accordance with UPMIFA, the School considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment
funds:
› The duration and preservation of the fund;
› The purposes of the School and the donor-restricted endowment fund;
› General economic conditions;
› The possible effect of inflation and deflation;
› The expected total return from income and the appreciation of investments;
› Other resources of the School; and
› The investment policies of the School.
582/11/2019
Other Disclosure Issues
› What about the organization that has a Community Foundation hold its
endowment?
Beneficial Interest Note: In November 2007, the Organization established a designated endowment fund at the ABC Foundation. The assets of
the Funds are held and owned by the Foundation in its corporate capacity and are not deemed held by the Foundation as trustee of a separate trust
for the Organization. Donors granted no variance power to the Foundation. The Foundation must distribute not less often than annually, unless
otherwise requested by the Organization, approximately 5% (determined by the Board of Trustees of the Foundation) of the fair market value of the
Funds, with the excess earnings, if any, being added to principal. The principal of the endowment must be retained, administered, and managed by
the Foundation for the benefit of the Organization. The Organization requested that no funds be distributed for either year ended June 30, 20XX or
20XX.
Endowment Note: Endowment Policies and Strategies - The Organization’s endowment is invested at the ABC Foundation and subject to its
investment policies. As noted in Note 5, the Foundation must distribute not less often than annually, unless otherwise requested by the
Organization, approximately 5.25% (determined by the Board of Trustees of the Foundation) of the fair market value of the Funds, with the excess
earnings, if any, being added to principal. The principal of the endowment must be retained, administered, and managed by the Foundation for the
benefit of the Organization. The Organization requested that no funds be distributed for either year ended June 30, 20XX or 20XX.
59
Underwater
Endowment Fund
Changes2/11/2019
ASU 2016-14: Underwater Endowment
Fund
› What is an underwater endowment fund?
› Accounting change of underwater endowment funds & classifications
› Provide the following enhanced disclosures about
• Underwater endowment funds, which include required disclosures of
› An NFP’s policy & any actions taken during the period, concerning appropriation from
underwater endowment funds
› Aggregate fair value of such funds
› Aggregate of the original gift amounts (or level required by donor or law) to be maintained
› Aggregate amount by which funds are underwater (deficiencies), which are to be classified as
part of net assets with donor restrictions
61
Deficiencies
Requirement
For each period for which a statement of financial position is
presented, an NFP shall disclose the aggregate amount of the
deficiencies for all donor-restricted endowment funds for which
the fair value of the assets at the reporting date is less than the
level required by donor stipulations or law.
622/11/2019 Deficiencies Example Funds with Deficiencies - 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 School to retain as a fund of perpetual duration. In accordance with GAAP, deficiencies of this nature that are reported in unrestricted net assets were $3,199,944 as of June 30, 20XX. These deficiencies resulted from unfavorable market fluctuations that occurred during the year. 63 Deficiencies Examples Funds with Deficiencies - From time to time, the fair value of assets associated with individual donor restricted endowment funds may fall below the total amount of the gifts made to the endowment by the donor. Deficiencies of this nature that are reported with donor restrictions were $858,399 and $2,599,771 as of December 31, 20XX and 20XX, respectively. These deficiencies resulted from unfavorable market fluctuations. Funds with Deficiencies - From time to time, the fair value of assets associated with individual donor restricted endowment funds may fall below the level that the donor contributed. There were no deficiencies at December 31, 20XX or 20XX. 64
2/11/2019
Board & Management
Designations/
Appropriations &
Enhanced Disclosure
Requirements
ASU 2016-14: Board & Management
Designations
› Provide the following enhanced disclosures about
• Amounts & purposes of governing board designations that result in self-
imposed limits on the use of resources
› Examples
• Earmarked for future programs
• Investment
• Contingencies
• Purchase or construction of fixed assets
• Other uses
• Some governing boards delegate the designation to internal management, which are
required to be considered & included in board-designated net assets
662/11/2019
Provide Enhanced Disclosures –
Board Designations/Appropriations
› Governing board designations, appropriations & similar transfers that
result in the addition or removal of self-imposed limits on the use of
resources without donor-imposed restrictions
› Those disclosures would include
• A description of the purpose, if not clear on the statement of financial position
• Amounts
• Types of transfers, e.g., those done because of standing board policies, as one-
time decisions, or for other reasons
• Qualitative &
• Quantitative information about any period-end balances of board designations
of net assets without donor restrictions
67
Net Asset
Requirements for
Presentation &
Enhanced Disclosure
Requirements2/11/2019
Classification of Net Assets
› Example net assets classification (think of these as the new buckets
required)
• Assets, such as land or works of art, donated with stipulations that they be used
for a specified purpose, be preserved & not be sold
• Assets donated with stipulations that they be invested to provide a
permanent source of income. These result from gifts & bequests that create a
donor-restricted endowment that is perpetual in nature
• Support of particular operating activities — should use the top three programs
• Investment for a specified term
• Use in a specified future period
• Acquisition of long-lived assets
69
Donor-Designated Restriction
Disclosure 2016
With donor restrictions:
Specific future periods
Unconditional Promises to Give – Not received $ 80,000
Unconditional Promises to Give – Program A 2,138,114
Allowance for Uncollected Promises (42,000)
Specific program and support activities – Endowment
Endowment A 147,350
Endowment B 422,467
Endowment C 32,213
Other 147,905
Endowment – Perpetual
Endowment A 534,122
Endowment B 875,512
Total net assets with donor restrictions $ 4,335,683
702/11/2019
ASU 2016-14 Format A Net Assets
Released from Restrictions
› FY 2016
• One line on the face of the SOA for “Net Assets” released from restrictions
› ASU 2016-14 Format A provides the following additional disclosure on
the face of the SOA related to Net Assets released from restrictions
• Satisfaction of program restrictions
• Satisfaction of equipment acquisition restrictions
• Expiration of time restrictions
• Changes in unconditional promises to give
• Appropriation from donor endowment & subsequent satisfaction of any related
donor restrictions
71
Release of Restrictions Footnote
Example
722/11/2019
Liquidity Disclosure
Requirements
ASU 2016-14: Liquidity
Disclosures/Presentation
Provide the following enhanced disclosures about
› Quantitative information 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
• Availability of a financial asset may be affected by
1) its nature,
2) external limits imposed by donors, grantors, laws & contracts with others, &
3) internal limits imposed by governing board decisions
742/11/2019
ASU 2016-14: Liquidity
Disclosures/Presentation
› Relevant information about the nature & amount of limitations on the use of cash & cash
equivalents (such as cash held on deposit as a compensating balance)
› Contractual limitations on the use of particular assets
• These include, for example,
› restricted cash or other assets set aside under debt agreements,
› assets set aside under self-insurance funding arrangements,
› assets set aside under collateral arrangements, or
› assets set aside to satisfy reserve requirements that states may impose under charitable gift annuity
agreements
75
The NFP – Financial Assets, at Year
End
2016
FINANCIAL ASSETS, AT YEAR END
Cash and cash equivalents $ 4,664,717
Investments 17,588,836
Investments – endowments with donor restrictions 2,011,664
Grants receivable 463,921
Pledges receivable, net 2,176,114
Other receivables 168,599
Beneficial interest in agency endowment 147,905
Total assets $ 27,221,756
762/11/2019
The NFP: Liquidity Example
Financial assets available at year end $ 27,221,756
Less those unavailable for general expenditures within one year, due to:
Undesignated bonds that mature in a period of time greater than one year (3,029,852)
Contractual or donor-imposed restrictions:
Restricted by donor for perpetual purpose (1,409,634)
Restricted by donor for time restriction beyond one year (1,135,119)
Subject to appropriation and satisfaction of donor restrictions (749,935)
Board designations:
Amounts set aside for long-term investing (11,400,000)
Amounts set aside for liquidity reserve (3,158,984)
Financial assets available to meet cash needs for general expenditures within one year $ 6,338,232
77
Liquidity Disclosure
New standard
The NFP's financial assets available within one year of the balance sheet date for general expenditure are as follows
Cash and cash equivalents $ 4,664,717
Grants receivable 463,921
Pledges receivable expected to be
collected in less than one year 1,040,995
Other receivables 168,599
$6,338,232
As part of The NFP's liquidity management, it has a policy to structure its financial assets to be available as its general
expenditures, liabilities and other obligations come due. In addition, The NFP invests cash in excess daily requirements in
short-term investments.
782/11/2019 ASU 2016-14: Liquidity Example Note › Not-for-Profit Entity A is substantially supported by restricted contributions. Because a donor’s restriction requires resources to be used in a particular manner or in a future period, Not-for-Profit Entity A must maintain sufficient resources to meet those responsibilities to its donors. Thus, financial assets may not be available for general expenditure within one year. › As part of Not-for-Profit Entity A’s liquidity management, it has a policy to structure its financial assets to be available as its general expenditures, liabilities & other obligations come due. › In addition, Not-for-Profit Entity A 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, which was $1,300 as of June 30, 20X1. 79 ASU 2016-14: Liquidity Example Note › There is a fund established by the governing board that may 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, Not-for-Profit Entity A also could draw upon $10,000 of available lines of credit (as further discussed in Note XX) or its quasi- endowment fund 80
2/11/2019 ASU 2016-14: Liquidity Example Note › The following slide reflects Not-for-Profit Entity A’s financial assets as of the balance sheet date reduced by amounts not available for general use because of contractual or donor-imposed restrictions within one year of the balance sheet date › Amounts not available include amounts set aside for long-term investing in the quasi-endowment that could be drawn upon if the governing board approves that action › Amounts already appropriated from either the donor-restricted endowment or quasi-endowment for general expenditure within one year of the balance sheet date are not subtracted as unavailable 81 ASU 2016-14: Liquidity Example Note › Not-for-Profit Entity A is substantially supported by restricted contributions. Because a donor’s restriction requires resources to be used in a particular manner or in a future period, Not-for-Profit Entity A must maintain sufficient resources to meet those responsibilities to its donors. › Thus, financial assets may not be available for general expenditure within one year. As part of Not-for-Profit Entity A’s liquidity management, it has a policy to structure its financial assets to be available as its general expenditures, liabilities, and other obligations come due. 82
2/11/2019 ASU 2016-14: Liquidity Example Note › In addition, Not-for-Profit Entity A 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, which was $1,300 as of June 30, 20X1. › There is a fund established by the governing board that may 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, Not-for-Profit Entity A also could draw upon $10,000 of available lines of credit (as further discussed in Note XX) or its quasi- endowment fund. 83
2/11/2019
Continuing Professional Education
(CPE) Credit
BKD, LLP is registered with the National Association of State Boards of
Accountancy (NASBA) as a sponsor of continuing professional
education on the National Registry of CPE Sponsors. State boards of
accountancy have final authority on the acceptance of individual
courses for CPE credit. Complaints regarding registered sponsors may
be submitted to the National Registry of CPE Sponsors through its
website: www.nasbaregistry.org.
85
CPE Credit
› CPE credit may be awarded upon verification of participant
attendance
› For questions, concerns or comments regarding CPE credit,
please email the BKD Learning & Development Department at
training@bkd.com
862/11/2019 BKD Thoughtware® bkd.com | @BKDNFP @BKDGOV @BKDHigherEd The information contained in these slides is presented by professionals for your information only & is not to be considered as legal advice. Applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor or legal counsel before acting on any matters covered.
2/11/2019 The content included herein is reprinted with permission from FASB for this express purpose. It may not be reproduced or distributed.
You can also read
