Lesson 3 – Purpose

Purpose


 
1. Simplify and Clarify

The new rules simplify the treatment of net assets in financial statements by focusing on the existence or absence of donor imposed restrictions as opposed to the types of restrictions, such as temporarily restricted vs. permanently restrict. This will clear the confusion surrounding the classification of temporarily restricted versus unrestricted assets. Under the new rules the Statement of Financial Position will only have two classes of “Net Assets” — net assets with donor restrictions and net assets without donor restrictions. Footnotes will also be changed to explain these classifications.

More importantly, the new rules replace the current three required classes of net assets (unrestricted, temporarily restricted and permanently restricted) with two new classes, simply those with donor restrictions and those without donor restrictions. This will simplify keeping track of donor imposed restrictions. Other advantages are the financial statements will now also provide more useful information about the nature, amounts, and types of donor restrictions. Nonprofits will no longer be required to distinguish between temporarily and permanently restricted net assets. Nonprofits will be allowed to provide more useful information about limits placed on net assets by both boards and donors.
 

 
2. Clarify Cash and Available Assets

This rule requires nonprofits to reveal limitations on the use of liquid assets (cash and investments). Nonprofits need to be prepared to discuss these restrictions with their CPA performing the audit or review engagement. They will be required to provide quantitative and qualitative information to explain how an organization manages its liquid resources available to meet cash needs for general expenditures within one year of the balance sheet date. Qualitative information will be handled by a “classified” presentation on the statement of financial position (breakdown of current and non-current assets and liabilities).

Quantitative information is handled by disclosing whether a financial asset’s availability is limited by:

  • Its nature
  • External limits imposed by donors, grantors, laws or contracts
  • Internal limits imposed by governing boards

 

 
3. Ensure consistency in the reporting of investment expenses and investment returns

The new rules require investment income to be reported net of related internal and external investment expenses (currently optional).

They will not be required to report the amount of those netted investment expenses. This removes the complexity of identifying costs associated with investment fees in investment returns such as mutual funds and hedge funds.

Nonprofits should be aware of the amount paid for investment management fees.
 

 
4. Correct misunderstandings about Statement of Cash Flows and Related Presentation Options

Nonprofits continue to have the freedom to choose to present operating cash flows using either direct or indirect methods (whichever best serves the informational needs of reader’s of the nonprofit’s financial statements).

The new rules eliminate the requirement to present or disclose the indirect method of the notes if the direct method is presented on the statement of cash flows.

This results in a more useful statement of cash flows and reduction in costs to prepare the financial statements.