With the upcoming implementation of the new FASB Accounting Standards Update 2016-14 (the standard) there will be changes occurring with the disclosures regarding board-designated net assets. For starters, board-designated net assets are net assets without donor restrictions that are subject to self-imposed limits by action of the governing board. Board-designated net assets may be earmarked for future programs, investments, contingencies, purchase or construction of fixed assets or other uses.
Under FASB No. 117 the disclosure of board-designated net assets was optional. However, with the standard, nonprofits will be required to disclose information about the amounts and purpose of board-designated net assets on the face of the statement of financial position or in the notes to the financial statements. You are not required to board-designate your unrestricted net assets. However, some non-profits find it beneficial to do so because it allows them to show commitment to a certain plan, program, or strategy.
Keep in mind that board-designations will have an impact on the new disclosures regarding the liquidity and availability of financial assets, so it is important you are taking availability of funds into consideration when assigning these internal designations. If your nonprofit decides to board-designate any unrestricted net assets, it is important that you take a look at your current policies and procedures to make sure you are prepared for the additional disclosure requirements under the standard.
Important Pieces of Your Board-Designated Net Assets Policy
1.) Purpose of designating unrestricted funds: It is important to set clear objectives in regards to what the goals are in designating funds. Examples could include:
- To create an internal line of credit to manage cash flow and maintain financial flexibility
- To enable the organization to sustain operations through delays in payments of committed funding
- To pay for one-time, nonrecurring expenses that will build capacity, such as staff development or research and development
2.) Calculation of designated amounts: How will your nonprofit determine the amount of designated money set aside? With the new disclosure requirements you will be required to disclose specific dollar amounts, so it is important you set guidelines on how those figures will be calculated. Examples could include:
- Estimation of reserves based on average recurring monthly operating costs
- Estimated cost of certain one-time expenses
3.) Intended use of the designated funds: How will the funds be used? Some objectives will be clear if you are designating funds for a specific project or item. However, in the case of maintaining reserves for operations, you may need to set specific guidelines for when the reserves may be used.
4.) Determined chain of command to designate funds and release funds for use: Will the board of directors have authority over the designation and release of funds? Or will this be delegated to management? It is important to set clear procedures regarding management of the funds to avoid misuse of funds.
5.)Plan for monitoring designated funds: How will the available funds be tracked and monitored? Will the amounts be set aside in a separate checking account or simply left co-mingled with other operating funds? If funds are being designated, it is important that the amounts be maintained and made available for the designated uses.
If you have any questions regarding board-designated net assets or the new disclosure requirements, please contact your Hawkins Ash CPAs representative.