Question

Explain the requirement for reporting net assets in accordance with ASC 958-205.

Answer 1

The main provisions of this Update, which amend the requirements for financial

statements and notes in Topic 958, Not-for-Profit Entities, require an NFP to:

1. Present on the face of the statement of financial position amounts for two

classes of net assets at the end of the period, rather than for the currently

required three classes. That is, an NFP will report amounts for net assets

with donor restrictions and net assets without donor restrictions, as well

as the currently required amount for total net assets.

2. Present on the face of the statement of activities the amount of the

change in each of the two classes of net assets (noted in item 1) rather

than that of the currently required three classes. An NFP would continue

to report the currently required amount of the change in total net assets

for the period.

3. Continue to present on the face of the statement of cash flows the net

amount for operating cash flows using either the direct or indirect method

of reporting but no longer require the presentation or disclosure of the

indirect method (reconciliation) if using the direct method.

4. Provide the following enhanced disclosures about:

a. Amounts and purposes of governing board designations,

appropriations, and similar actions that result in self-imposed limits

on the use of resources without donor-imposed restrictions as of the

end of the period.

b. Composition of net assets with donor restrictions at the end of the

period and how the restrictions affect the use of resources.

Qualitative information that communicates how an NFP manages its

liquid resources available to meet cash needs for general

expenditures within one year of the balance sheet date.

d. Quantitative information, either on the face of the balance sheet or in

the notes, and additional qualitative information in the notes as

necessary, that communicates the availability of an NFP’s financial

assets at the balance sheet date to meet cash needs for general

expenditures within one year of the balance sheet date. Availability

of a financial asset may be affected by (1) its nature, (2) external

limits imposed by donors, grantors, laws, and contracts with others,

and (3) internal limits imposed by governing board decisions.

e. Amounts of expenses by both their natural classification and their

functional classification. That analysis of expenses is to be provided

in one location, which could be on the face of the statement of

activities, as a separate statement, or in notes to financial

statements.

f. Method(s) used to allocate costs among program and support

functions.

g. Underwater endowment funds, which include required disclosures of

(1) an NFP’s policy, and any actions taken during the period,

concerning appropriation from underwater endowment funds, (2) the

aggregate fair value of such funds, (3) the aggregate of the original

gift amounts (or level required by donor or law) to be maintained, and

(4) the aggregate amount by which funds are underwater

(deficiencies), which are to be classified as part of net assets with

donor restrictions.

5. Report investment return net of external and direct internal investment

expenses and no longer require disclosure of those netted expenses.

6. Use, in the absence of explicit donor stipulations, the placed-in-service

approach for reporting expirations of restrictions on gifts of cash or other

assets to be used to acquire or construct a long-lived asset and reclassify

any amounts from net assets with donor restrictions to net assets without

donor restrictions for such long-lived assets that have been placed in

service as of the beginning of the period of adoption (thus eliminating the

current option to release the donor-imposed restriction over the estimated

useful life of the acquired asset).

Donor-Restricted Endowment Fund

An endowment fund that is created by a donor stipulation (donors include other

types of contributors, including makers of certain grants) requiring investment of

the gift in perpetuity or for a specified term. Some donors or laws may require that

a portion of income, gains, or both be added to the gift and invested subject to

similar restrictions. The term does not include a Board-Designated Endowment

Fund. See Endowment Fund.

Net Assets

The excess or deficiency of assets over liabilities of a not-for-profit entity (NFP),

which is classifieddivided into threetwo mutually exclusive classes according to the

existence or absence of donor-imposed restrictions. See Net Assets with Donor

Restrictions and Net Assets without Donor Restrictionsunrestricted net

assets, temporarily restricted net assets, and permanently restricted net

assets.

Reclassification of Net Assets

Simultaneous increase of one class of net assets and decrease of another,another.

A reclassification of net assets usually as a resultresults from a donor-imposed

restriction (donors include other types of contributors, including makers of certain

grants) being satisfied or otherwise lapsingof the release or lapsing of restrictions.