FINRA's BrokerCheck

Net Assets and Endowment Funds

Download a copy of this article


Accounting Standards Update (ASU) 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities, implements various changes in financial reporting requirements for not-for-profit entities. The objective of the standard is to provide more useful information to donors, grantors and other users of not-for-profit financial statements. This article is the fourth in a series about this new standard  and focuses on the requirements for reporting and classifying net assets.

Net Asset Classification

The ASU modifies current guidance, which requires three net asset classes: unrestricted, temporarily restricted, and permanently restricted, to requiring just two net asset classes: with donor restrictions and without donor restrictions. Included in the “with donor restrictions” classification are those net assets that are currently found in the temporarily restricted classification and “funds of perpetual duration”, which replaces the current “permanently restricted” classification. The term “donors” includes individuals and other types of contributors, such as foundations and other grant makers. Included in the “without donor restrictions” classification are those net assets currently found in unrestricted net assets, including board-designated net assets.

See Figure 1: For a net assets presentation example. 

Relevant information about the nature and amounts of donor restrictions on net assets, either on the face of the statement of financial position or in the notes, will continue to be required along with enhanced disclosures as to how and when the resources can be used, including the specified purpose(s), specified time(s), and identification of funds of perpetual nature.

See Figure 2: Sample footnote disclosure.

Board Designated Net Assets

The Financial Accounting Standard Board (FASB) ASC has revised the definition of board-designated net assets as follows: “net assets without donor restrictions subject to self-imposed limits by action of the governing board. Board-designated net assets may be earmarked for future programs, investment, contingencies, purchase or construction of fixed assets, or other uses. Some governing boards may delegate designation decisions to internal management. Such designations are considered to be board-designated net assets. The ASU will now require not-for-profits to include enhanced disclosures concerning board-designated net assets, which includes disclosing the amounts and purposes of board-designated net assets either on the face of the statement of financial position or in the notes. These enhanced disclosures are intended to provide users with more relevant information about how internally imposed limits affect the availability of resources. In addition to these enhanced disclosures, not-for-profits will need to have policies and procedures regarding the conditions under which board-designated net assets can be designated and how such net assets may be spent. financing, and soliciting funds other than contributions and membership dues. Some governing boards may delegate designation decisions to internal management. Such designations are considered to be board-designated net assets.”

Underwater Endowment Funds

The FASB ASC now includes a formal definition for underwater endowments, which is defined as follows: “a donor-restricted endowment fund for which the fair value of the fund at the reporting date is less than either the original gift amount or the amount required to be maintained by the donor or by law that extends donor restrictions”. Under the new ASU, not-for-profits will now be required to aggregate the amount by which endowment funds are underwater as unrestricted net asset category. The assessment of underwater position is by individual fund and does not permit netting of the aggregate of all funds. Additionally, a not-for-profit will be required to disclose the following:

  1. A not-for profit’s policy and any actions taken during the period concerning appropriation from underwater endowment funds,
  2. The aggregate fair value of such funds, and
  3. The aggregate of the original gift amounts (or level required by donor or law) to be maintained.

The requirement to disclose a not-for-profit’s policy concerning the appropriation of underwater endowment funds is required (regardless if the not-for-profit has underwater funds). The enhanced disclosures surrounding underwater investments are intended to inform users about the relative degree to which such funds are underwater, of potential actions that governing boards might take in response, and of how such actions could affect a not-for-profit’s liquidity.

Effective Date

The implementation deadline for ASU 2016-14 is December 31, 2018 for calendar year entities, or 2019 for fiscal year entities. Early implementation of the standard is permissible, and retrospective application is required.

What Steps to Take Now

Management and those charged with governance should begin considering the steps needed to implement the new standard as it relates to net asset presentation and disclosure. Steps to ensure smooth implementation include:

Net Asset Classification

  • Determine whether you need to adjust your general ledger (GL), excel spreadsheet, or other tracking mechanism to accommodate the new terminology and presentation.
  • Determine the appropriate level of disaggregation of net assets you need to present: net assets without donor restrictions; those with donor restrictions that will be satisfied over time and/or by expenditure for a particular purpose; and those that will be maintained in perpetuity.
  • Decide the degree of disaggregation you wish to present on the face of the statement of financial position versus the footnotes.

Board Designated Net Assets

  • Assemble information about the amounts and purposes of board-designations of net assets without donor restrictions to be provided in notes and/or on the face of the statement of financial position.
  • Determine proper presentation of any board-designated endowment funds in the related endowment note.
  • Formalize policies and procedures regarding board-designations on net assets including conditions under which board-designated net assets can be designated and how such net assets may be spent.
  • Draft language to include in the liquidity and availability note pertaining to the self-imposed limitations on board-designated funds and the conditions under which such funds would be made available to meet expenditure needs.

Underwater Endowment Funds

  • Formalize policies regarding the appropriation from underwater endowment funds.
  • Recast your endowment note to conform to the new two net asset categories presentation.
  • For underwater endowments, determine:
    • The fair value of underwater funds
    • The original gift amount or level required by donor stipulations or law that extends donor restrictions
    • The aggregate amount of deficiencies of underwater funds
    • Remember that the underwater portion of endowments is now presented entirely in funds with donor restrictions

With early adoption of the new standard permitted for future year-ends, and the final implementation deadline quickly approaching, we encourage you to begin preparing your organization now for this important transition. Rehmann professionals are ready to help guide you through all aspects of implementing ASU 2016-14.

Additional Resources

Meet The Rehmann Team

Start typing a name ...
Searching for "{{nameQuery}}"...
Start typing a experience ...
Searching for "{{experienceQuery}}"...
Start typing a location ...
Searching for "{{locationQuery}}"...
Or view a list of team members