In Review: Accounting Standards Update for Nonprofits
By Matt Huffner, Partner, Assurance Services
To comply with recent implementation deadlines, nonprofit organizations, in many cases, have had to make a number of changes to their fair value measurement disclosures, including the hierarchy, net asset value, and other qualitative and quantitative items. When the Financial Accounting Standards Board (FASB) issued changes to the disclosure requirements for fair value measurement (ASU 2018-13), many nonprofit leaders were very happy to have an opportunity to shorten their fair value measurement disclosures. As a result of ASU 2018-13, nonpublic nonprofits no longer had to disclose various types of transfers, policies, and the infamous Level 3 rollforward. These nonpublic entities were able to implement the reduced disclosures right when the ASU was issued and did not have to think about them again.
However, the ASU also contained new additions to the fair value measurement standards, and organizations could delay implementation of these additions until the overall effective date. So, for the public nonprofits (i.e., organizations with certain types of bonds outstanding), this ASU came back energetically this year as public nonprofit clients were required to implement the additions for years starting after 2019. (The ASU identifies certain requirements that are only applicable to the public nonprofits.)
Some of the additions required in the ASU concerned level 3 fair value measurements. Among our public nonprofit clients with various types of Level 3 fair value measurements disclosed in their financial statements, we noted a few common changes to those disclosures. Those changes were primarily related to trust interests, split interest, and investments:
Trust interests: Increased disclosure of the rates used (ranges, averages, or even weighted average rates) to determine the value of these interests. Organizations mainly used discounted cash flows and/or underlying assets’ values along with these rates.
Split interest and other annuity liabilities: Increased disclosure of the actuarial information used in determining valuation. In many cases, organizations began disclosing average life expectancies used, or the range of life expectancies.
Investments: Although investments composition varies quite a lot across organizations we have seen a few instances of additional focus, mainly on disclosures related to the market and income approaches in terms of valuation techniques, ranges, and weighted averages used:
- Market comparables like EBITDA and broadcast cash flows.
- Earnings multipliers.
- Yield rate.
- Liquidation probabilities and exit multipliers.
- The price of land in various markets.
The other standard affecting some of our nonprofit organizations involves defined benefit pension or other post-retirement plans, as outlined in ASU 2018-14, subtopic 715-20. Here again we see organizations receiving reduced disclosure requirements that are then offset by the addition of new requirements. Of our nonprofit organizations with these types of plans (which generally involve the use of actuaries), many were already able to take advantage of the reduced disclosure requirements for nonpublic nonprofit entities. This reduced disclosure option is not new and was not removed (thankfully) by this standard. The option is an invaluable way for applicable nonprofits to save time and effort on their pension plan disclosures.
However, for public nonprofits, this reduced disclosure requirement is not available. As a result, many organizations have implemented the new ASU 2018-14 early (as permitted) this year as they find it allows them to reduce their disclosures in some areas. Others are still evaluating the effect. They have some additional time since the standard is not required until next year. Those that implemented early were able to remove a number of disclosures commonly found in the pension and postretirement benefits notes:
- Organizations said goodbye to disclosing amounts expected to be recognized next year in net periodic postretirement costs.
- They no longer disclose plan assets that are expected to be returned to the employer.
- Nonpublic nonprofits no longer have to disclose Level 3 rollforward of applicable plan financial assets and liabilities.
- Public entities with postretirement health and welfare plans no longer have to disclose the effect of a 1% change in health care cost trend rates, etc.
The major disclosure that many nonprofits added (or are intending to add in the future) is an explanation for the reasons for significant changes, gains, and losses to the benefit obligation. Some organizations that have reduced disclosure requirements have added additional information; others have asked their actuaries for a brief disclosure to use in their financial statements.
In short, the two ASUs above should result in reduced disclosures in your financial statements (though in some cases, new disclosures need to be added). It could be worth a look through the note disclosures to decide what is no longer applicable or even required to be disclosed.