Nonprofit Resources
Part Three – A Deeper Dive into ASU 2016-14 Implementation Issues
This article originally appeared on the BDO Nonprofit Standard blog. Copyright © 2017 BDO USA, LLP. All rights reserved. www.bdo.com
We’ve taken several in-depth looks at changes under Accounting Standards Update (ASU) 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities in the Nonprofit Standard. You can read the first two parts of this series here and here.
In part three of this blog series, we’ll look at how the ASU will impact the reclassification of assets after donor-imposed restrictions expire.
ASU 2016-14 eliminates the over-time approach for the expiration of restrictions on capital gifts and requires the use of the placed-in-service approach in the absence of donor explicit stipulations otherwise.
If a nonprofit has received funds restricted to the purchase or construction of property, plant or equipment or a donation of such an asset with an explicit donor-imposed restriction on the length of time that the asset must be used these would be classified as net assets with donor restrictions when received. These net assets with donor restrictions should be reclassified as net assets without donor restrictions in the statement of activities as the restriction expires. The amount that is reclassified may or may not be the same as the amount of depreciation recorded on the asset. The amount reclassified each year should be based on the length of time of the explicit time restriction for the use of the asset. However, the depreciation should be based on the useful economic life of the asset.
If the donor does not explicitly specify how long the donated assets or assets constructed or acquired with cash restricted for the acquisition or construction must be used, then the restrictions on the long-lived assets, if any, expire when the assets are placed in service. When the assets are placed in service the entire amount of the contribution of property, plant or equipment, or cash shall be reclassified from net assets with donor restrictions to net assets without donor restrictions.
However, if the donor explicitly states that the donated assets or assets constructed must be held in perpetuity and that the asset cannot be sold or transferred then there will not be a release from restriction when the asset is placed in service. In this scenario, the initial donation will be recorded as a contribution with donor restrictions. The asset will remain in net assets with donor restrictions and be disclosed as an asset held in perpetuity.
When examining the effect of the ASU on your organization you should look at whether you have any contributions of long-lived assets that are being reclassified over time without any explicit stipulation of a time period for the use of the asset. If these assets have already been placed in service, the amount of these long-lived assets should be reclassified from net assets with donor restrictions to net assets without donor restrictions upon adoption of the ASU.
In addition, the organization will have to modify its policy with regard to the receipt of contributions for the construction of long-lived assets or donated long-lived assets. Upon adoption of the ASU, an organization will have to recognize revenue without donor restrictions when the donated assets are placed in service absent any explicit donor stipulations otherwise. In the past, organizations had an option to either follow the placed-in-service approach or to place an implied time restriction on the long-lived assets.
Interested in learning more about changes to nonprofit financial reporting under ASU 2016-14? I recently co-authored a book on the topic with my colleagues from BDO’s Institute for Nonprofit ExcellenceSM and LangCPA Consulting. The third edition of “How to Read Nonprofit Financial Statements: A Practical Guide” has numerous illustrations and exercises to help readers feel quickly at home with the format of nonprofit financial statements.
For more information, contact Tammy Ricciardella, technical director, at [email protected], or email CapinCrouse at [email protected].
