Net Asset Classification * Why Is It Important?

Report
Net Asset Classification –
Why Is It Important?
VICKI VANDENBERG, CPA
PARTNER
KEITH MARTINEZ, CPA
ASSOCIATE
PLANTE MORAN
DECEMBER 13, 2011
Agenda
 Increased scrutiny
 Reliance on net assets
 Common errors
 Classification – FASB
 Classification – GASB
 Case studies
 Meaning to the reader of the statements
 How to handle an error
Recent Public Scrutiny
 Ohio Senate Finance Chairman Chris Widener
 $8B state budget deficit
 $3B in combined reserves for Ohio public colleges
and universities
 Request for tuition increases
 Shared concern with university presidents and
financial officers
Reliance on Net Asset Reporting
 Boards are approving recommendations of
management
 Governance may not understand the different net
asset categories
 Board designated reserves versus unrestricted net
assets
Common Mistakes
 Presentation of board designated net assets
 Treatment of appreciation/depreciation in
endowment investments
 Unspent bond proceeds
 Undistributed earnings on endowment funds
 Classification of temporarily restricted or expendable
net assets
Net Asset Classification - FASB
 Section 958-210-20 - provides definition of net asset
categories
 Section 958-210-45-9 – describes classification of
net assets
 Section 958-210-55 – provides format of net asset
section
Net Asset Classifications – FASB cont.
 Temporarily Restricted
 Net assets resulting from contributions or other inflows with
donor-imposed stipulations that expire by the passage of time
or specified use of the funds
 Usually restricted fund, part of the endowment fund, portion
of the plant and student loan fund is closed into temporarily
restricted
Net Asset Classifications – FASB cont.
 Permanently Restricted
 Net assets resulting from contributions or other inflows with
donor-imposed stipulations for the funds to be held in
perpetuity
 Even though the fund is permanently restricted, the earnings
could be unrestricted depending on the details of the
restriction imposed
 Corpus of the endowment fund and part of the student loan
fund is classified in permanently restricted
Net Asset Classifications – FASB cont.
 Unrestricted
 Net assets that are neither temporarily or permanently
restricted by donor-imposed stipulations
 Generally result from revenues from providing services,
unrestricted contributions, and dividends or interest less
expenses incurred providing services, raising contributions
and performing administrative functions
 Usually general, auxiliary and most of the plant fund is closed
into unrestricted
Net Asset Classification – FASB cont.
 Based on the existence or absence of donor-imposed
restrictions
 Amount of each class must be reported on the face of
the statement
 Nature and amounts of each type (temporarily,
permanently) reported on the face or in the notes
 Designations of net assets can be disclosed on the
face of the statements and are classified under
unrestricted net assets
Net Asset Classification - GASB
 GASB Statement No. 34, paragraphs 32-37
 GASB Comprehensive Implementation Guide,
Chapter 7
Net Asset Classification – GASB cont.
Net assets should be presented in three components
 Invested in capital assets, net of related debt
 Restricted
 Unrestricted
Net Asset Classifications – GASB cont.
 Invested in Capital Assets – net of related debt
 Represents the balance of net assets that are invested in
property and equipment
 Includes restricted capital assets
 Capital Assets less long term debt plus bond issuance costs
plus unspent bond proceeds
Net Asset Classifications – GASB cont.
 Restricted Net Assets
 Externally imposed by creditors, grantors, contributors
 Imposed by law through constitutional provision or enabling
legislation
 Must distinguish between expendable and nonexpendable
Net Asset Classifications – GASB cont.
 Restricted – Expendable
 Similar to temporarily restricted (FASB)
 Restricted by a third party for a specific use
 Examples include unspent grants and contributions
 Restricted – Nonexpendable
 Similar to permanently restricted (FASB)
 Required to be retained in perpetuity
 Endowment corpus
Net Asset Classification – GASB cont.
 Unrestricted Net Assets
 Consist of net assets that do not meet the definition of the
other two categories
 No restrictions are imposed
 Includes designated
Net Asset Classification – GASB cont.
 Designations of net assets cannot be disclosed on the
face of the statements


Should not be reported on the face of the statements
Include in MD&A or footnotes
Net Asset Case Study #1
 Board approved transferring surplus over $100,000
from general fund to endowment fund
 How do you report?
 Answer:
 The $100,000 is considered part of board designated net
assets – if GASB can report in footnotes or MD&A, if FASB,
can show as a component of unrestricted
Net Asset Case Study #2
 A portion of the endowment fund is considered
quasi-endowed due to no donor restriction – where
are earnings reported?
 Answer:

The earnings are reported as unrestricted. Further analysis
should be done to determine if they should also be considered
board designated
Net Asset Case Study #3a
 An endowment fund was underwater in prior year by
$50,000. This year the unrealized gains on the fund
are $75,000 – how do you report the current year
gain (FASB example)?
 Answer:

$50,000 of the unrealized gains are reported as unrestricted
since the under water is to be repaid. The remaining $25,000
is reported as temporarily restricted until appropriated for
expenditure in accordance with terms of the endowment fund.
Net Asset Case Study #3b
 An endowment fund was underwater in prior year by
$50,000. This year the unrealized gains on the fund
are $75,000 – how do you report the current year
gain (GASB example)?
 Answer:

$50,000 of the unrealized gains are reported as a recapture of
nonexpendable since the under water is to be repaid. The
remaining $25,000 is reported as expendable until
appropriated for expenditure in accordance with terms of the
endowment fund.
Net Asset Case Study #4
 In accordance with a donor endowment challenge for
every dollar contributed up to $5,000 the Board will
match the endowment gift. How do you report the
match (FASB)?
 Answer:

If a donor contributes to an endowment fund by contributing
$5,000 those earnings are reported as permanently restricted
contributions. The Board approved match is recorded as a net
asset transfer moving from unrestricted to permanently
restricted.
Net Asset Case Study #5
 Recognition of increase in market value on
University endowment fund, where reported?
 Answer:

The increase in market value is treated similar to interest and
dividends and is reported as restricted expendable absent any
donor restrictions.
Net Asset Case Study #6
 Market value of endowment fund falls below value of
original gift, where is the unrealized loss reported?
 Answer:


GASB - The unrealized loss should be recorded against
restricted expendable however, a deficit in restricted net assets
can not be shown (excess would go against restricted nonexpendable)
FASB – The unrealized loss should be recorded against
restricted however, a deficit in restricted net assets can not be
shown (excess would go against unrestricted)
What does it mean to the reader of the FS?
Provides the financial statement reader with…
 What assets have external purpose restrictions
 What assets are spoken for (designated)
 What assets are available for use
How to Handle an Error?
 Depends on the nature of the error
 Between restricted and unrestricted
 Between restricted expendable and nonexpendable
 Depends on materiality
 Percentage of total assets
 Percentage of net assets
 Percentage of total revenue
How to Handle an Error?
Financial statement treatment
 Adjust the current year presentation
 Prior period adjustment
Classification of error/finding
 Control deficiency
 Significant deficiency
 Material weakness
Thank You!
Vicki VanDenBerg
[email protected]
269.567.4618
Keith Martinez
[email protected]
614.222.9086

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