Financial Accounting Standards Board Nonprofit Update
- Unrestricted net assets are assets that have no restrictions and can be used in any manner by the organization.
- Temporarily restricted net assets are assets that have a time or purpose restriction. Assets with a time restriction must be used during the period the donor has restricted them for, and assets with a purpose restriction must be used for the purpose specified by the donor.
- Permanently restricted net assets must be indefinitely retained by the organization, per restrictions set by the donor. These include assets such as endowments and real estate. The organization can invest the endowment and receive the interest, but cannot spend the principle.
Another change required by this standard is the reporting of investment income. Not-for-profits will report investment income as a net asset without donor restrictions, unless there is a donor imposed restriction on how those funds can be used. They will also be required to report their investment income net of internal and external investment expenses. This will allow for enhanced comparability between all not-for-profits, whether their investments are managed internally at a low cost or by an investment firm.
Finally, this standard also changed requirements for the classification of underwater endowments. Underwater endowments are endowments that have a current market value that is less than the original donation amount. The deficit in these assets is currently classified as an unrestricted asset, but the new standard will require organizations to report them as a net asset with donor restrictions. This will show a loss to net assets with donor restrictions rather than a loss of unrestricted net assets. In the notes to the financial statements, the organization must disclose the original amount of the endowment, the current fair value, the amount the endowment is deficient, and the organization’s policy about underwater endowments.
For more information on these changes or any questions regarding our firm’s nonprofit services, please feel free to contact a member of our team.