FASB Decision Could Redefine and Reduce Net Asset Classes
November 26, 2013
In September 2013, the Financial Accounting Standards Board (FASB) tentatively decided to replace the three net asset classes currently required for not-for-profit (NFP) financial reporting with two: those with donor restrictions and those without. This change would remove the current hard-line distinction between temporary restrictions and permanent restrictions. Rather than distinguishing between temporary and permanent restrictions, NFPs would need to describe the differences in the nature of the restrictions and address both how and when those resources could be used.
No changes are anticipated to the composition of unrestricted net assets, but the label would be changed to "Net Assets Without Donor-Imposed Restrictions" because the term "unrestricted" may create misconceptions as to the availability of net assets with that label. Members of FASB's Not-for-Profit Advisory Committee (NAC), the NFP Project Financial Statements Project Resource Group (PRG), NACUBO's Accounting Principles Council, and other constituents expressed concern and frustration with having to continually educate NFP boards, management, and other stakeholders about the availability of unrestricted net assets. For example, most higher education institutions have a significant amount of capital assets on their books that are unrestricted but illiquid. Similarly, amounts designated by an NFP's board as quasi-endowments are included in unrestricted but not available for general support of the institution's operations.
While using only two net asset classes would simplify the presentation on the face of the financial statements, the Board expressed concerns that important information would be lost. As a result, the Board tentatively decided to require disclosure about the composition of net assets at the end of the reporting period. In addition, disclosure about the use of donor-restricted assets (a roll-forward of activity for the period) would be required.
In conjunction with its discussion of net asset classes, FASB considered whether the classification and presentation of net assets could be used to convey information about liquidity. It concluded that such would not be feasible as nearness to cash cannot be determined by the classification of net assets.
Impact on Higher Education
The proposed changes to the net asset classes have caused concern among a number of higher education institutions. One major concern is how the rating agencies or the Department of Education would interpret the new presentation—specifically, how they might use the presentation to calculate the numerator, or "expendable net assets," for an institution's primary reserve ratio. This concern demonstrates a need to provide sufficient detail in the notes to the financial statements to facilitate an understanding of when and how net assets with donor-imposed restrictions can be used.
Institutions will want to highlight net assets with donor-imposed restrictions that are not permanently restricted. Through the disclosure institutions can explain that, absent a restriction in perpetuity, all net assets are expendable to support mission-related activities over the next reporting period and into the future. NACUBO has developed two possible presentations that explain net assets with donor-imposed restrictions typical of higher education institutions.
Another concern is how the current "deemed spent" guidance will impact the categorization of net assets. (Deemed spent is the concept that an institution spends its most restricted funds first; so, for financial reporting purposes, if expenses are incurred for which restricted funds are available they are shown as unrestricted net assets.) Today, this guidance is applied inconsistently—some institutions follow the guidance strictly, while others hold some amounts in temporarily restricted net assets until actually spending them. While this is a measurement issue and the NFP Reporting Project deals only with presentation, NACUBO has suggested FASB may need to address some measurement issues to facilitate the changes in presentation.
NACUBO staff, members of its Accounting Principles Council, and higher education's NAC representative will continue advising the Board on this project and remain in close contact with FASB staff. This is the third web article in a news series covering FASB decisions designed to change the NFP reporting model. NACUBO will enhance its accounting webpage to provide more project details and gather membership feedback in preparation for an industry response to proposed changes when an exposure draft is issued for comment. An exposure draft is expected to be issued before the fourth quarter of 2014.
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