Net Assets – Simplified!
With the growing complexity in our regulatory environment, simplification of net asset classifications is a breath of fresh air. The Financial Accounting Standards Board (FASB) has become a trend setter with the issuance of Accounting Standards Update (ASU) No. 2016-14, a portion of which eliminates one of the net asset classifications. Previously, organizations were required to present unrestricted, temporarily restricted and permanently restricted net assets for financial reporting purposes. The three categories have caused confusion for users of financial statements and accountants alike. So the new ASU simply includes “net assets without donor restrictions” and “net assets with donor restrictions.” Seems fairly straightforward, right? Here’s what that means:
2 become 1
Simply put, net assets previously disclosed as temporarily restricted and permanently restricted will now be condensed into one category: “net assets with donor restrictions.” Contributions and other gift instruments having donor restrictions that expire either over time or through satisfying the purpose restriction were included in temporarily restricted net assets. An organization might also receive a contribution from a donor with restrictions that do not expire or, in other words, the asset is required to be maintained in perpetuity. Those net assets were reported in the permanently restricted classification. The combination of these two classifications now simplifies the face of financial statements and all related disclosures, including the nature of net asset composition and endowment disclosures. The change also reduces the administrative burden to prepare all of the previously required detail for financial reporting purposes.
Organizations should still separately track contributions received with different types of restrictions, whether those contributions are to be maintained in perpetuity, or utilized for a specific purpose, or over a period of time as those specified donor restrictions still exist. The new ASU also updates current standards for endowments, including the need for organizations to “asses the relevant facts and circumstances for their endowment gifts and their relevant laws to determine the classification of endowment funds” within the new reporting model. With that in mind, organizations do still have the option to further “disaggregate net assets with donor restrictions between those expected to be maintained in perpetuity and those expected to be spent over time or for a particular purpose” (previously the temporarily and permanently restricted classifications). The organization is merely required to summarize those disaggregated amounts to the two new net asset classifications on the statement of financial position.
What about unrestricted net assets?
Not much has changed for this classification beyond the label “net assets without restrictions.” This classification includes revenues received without any restrictions imposed by a donor. When a donor restriction has expired, those net assets are still released and reclassified from net assets with donor restrictions to net assets without restrictions.
The ultimate goal of this change is to provide a clearer picture of the organization’s availability of resources, and to make it easier for financial statement readers to understand. This is one giant step in the right direction.