The terms “footnote disclosure overload” and “standards overload” have been used off and on for over 20 years by various constituent groups to describe their concerns about the complexity of Financial Accounting Standards Board (FASB) accounting rules and the resulting profusion of footnote disclosures.
By definition, financial statements are backward-looking. The statement of financial position (balance sheet) shows you the values as of a certain point in time, known as the organization’s year-end, whereas the statement of activities (income statement) and cash flows shows how the organization performed over a period of time, typically a year. Footnote disclosures describe how the numbers in the statement of financial position, statement of activities and cash flow statements were determined and provide a sense of where the organization is going. Financial statements are required to provide full disclosure, including future contingencies and commitments. The footnotes complete the organization’s obligation to disclose this information.
Over the years, the FASB has had several projects to “streamline disclosures” and a “Disclosure Framework” project to improve the effectiveness of disclosures in notes to financial statements by clearly communicating the most important information to users of each entity’s financial statements. Although reducing the volume of notes to financial statements was not the primary focus, the FASB hopes that a sharper focus on important information will result in reduced volume in most cases. However, it seems that these projects have been somewhat forgotten for nonprofits.
The extensive footnote disclosures have in many ways been a detriment to the main reason why there are footnote disclosures in the first place: to inform the stakeholders of relevant information about the organization. As a result, most stakeholders do not fully read the notes because of their length. Important information can easily be buried, and more footnotes have resulted in additional costs to prepare the annual financial statements both internally and externally.
ADDITIONAL DISCLOSURES FOR NONPROFIT ORGANIZATIONS
Recently, generally accepted accounting principles (GAAP) have become more complex, requiring additional and more elaborate disclosures, especially for nonprofit organizations. It is not uncommon to have from 10 to more than 20 pages of footnote disclosures for a nonprofit organization, and the recently issued Accounting Standards Updates (ASU) issued by the FASB will significantly increase the footnote disclosures for nonprofits.
Recent ASUs that require significant additional disclosures for nonprofit organizations are as follows:
- ASU 2016-14 Not-for-Profit Entities (Accounting Standards Codification (ASC) Topic 958)—Was effective for fiscal years beginning after December 15, 2017 (December 31, 2018 year-ends)
- ASU 2018-08 Clarifying the Scope and the Accounting Guidance for Contributions Received and Made— Effective for fiscal years beginning after December 15, 2018 (December 31, 2019 year-ends)
- ASU 2014-09 Revenue from Contracts with Customers (ASC Topic 606)—Effective for fiscal years beginning after December 15, 2018 (December 31, 2019 year-ends)
- ASU 2016-02 Leases (ASC Topic 842)—Will be effective for fiscal years beginning after December 15, 2020 (December 31, 2021 year-ends)
Proposed Gifts-in-Kind Exposure Draft with an additional footnote disclosure:
- FASB is working on a project regarding gifts-in-kind (donated nonfinancial assets) expected to be issued in the first quarter of 2020.
DISCLOSURES REQUIRED BY ASU 2016-14 NOT-FOR-PROFIT ENTITIES (ASC TOPIC 958)
ASU 2016-14 Not-for-Profit Entities was issued to make improvements for the net asset classifications, to provide information regarding liquidity and availability of resources, and to remove inconsistencies in financial reporting for better comparability among nonprofit organizations. It provides the following:
- new liquidity and availability of resources footnote;
- a requirement to disclose the amounts and purposes of governing board designations that result in self- imposed limits on the use of resources at the end of their reporting period;
- enhanced qualitative description of the method(s) used to allocate costs among program and support functions; and
- additional disclosures for endowment funds that are underwater.
DISCLOSURES REQUIRED BY ASU 2018-08 CLARIFYING THE SCOPE AND THE ACCOUNTING GUIDANCE FOR CONTRIBUTIONS RECEIVED AND MADE
FASB issued this ASU because of difficulty and diversity in practice among not-for-profits with the following:
- characterizing grants and similar contracts with government agencies and others as reciprocal transactions (exchanges) or nonreciprocal transactions (contributions); or for
- distinguishing between conditional and unconditional contributions.
A grant can either be an exchange transaction or a contribution, depending on the grant agreement. If a grantor (government or foundation) is not receiving direct commensurate value for the funds provided/ promised, then the grant is a contribution and this ASU is applicable regarding how the revenue is recognized. If the grant document has a barrier to overcome before the revenue can be recognized and a right of return/release from obligation, it is considered a conditional contribution until the conditions are met.
If the grantor is receiving direct commensurate value for the funds provided/promised, then the grant is an exchange transaction and ASU 2014-09 Revenue from Contracts with Customers (ASC Topic 606) is applicable regarding how the revenue is recognized. (See below.)
- Conditional government and foundation grants will result in an additional footnote disclosure. For conditional promises to give, an organization needs to disclose the following:
- the total of the amounts promised; and a description and amount of each group of promises having similar characteristics, such as amounts of promises conditioned on establishing new programs, completing a new building, and raising matching gifts by a specified date.
For unconditional promises to give, an organization needs to disclose the following:
- the number of promises to give that is receivable in less than one year, in one to five years, and in more than five years;
- the amount of the allowance for uncollectible promises to give; and
- the discount rate to present value for the receivables due more than one year.
DISCLOSURES REQUIRED BY ASU 2014-09 REVENUE FROM CONTRACTS WITH CUSTOMERS (ASC TOPIC 606)
The core principle of Topic 606 is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
The objective of the disclosure requirements in Topic 606 is for an entity to disclose sufficient information to enable users of the financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The nature and extent of this information differ between public and nonpublic entities (nonprofits are considered to be public entities if they issue public debt or are a conduit debt obligor for debt that is not privately placed).
This ASU requires an entity to provide information about the following:
- revenue recognized from contracts with customers, including the disaggregation of revenue into appropriate categories;
- contract balances, including the opening and closing balances of receivables, contract assets, and contract liabilities;
- performance obligations, including when the entity typically satisfies its performance obligations and the transaction price that is allocated to the remaining performance obligations in a contract; and significant judgments, and changes in judgments, made in applying the requirements to those contracts.
Additionally, an entity is required to provide quantitative and/or qualitative information about assets recognized from the costs to obtain or fulfill a contract with a customer.
DISCLOSURES REQUIRED BY ASU 2016-02 LEASES (ASC TOPIC 842)
The FASB issued this update to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The main difference between previous GAAP and Topic 842 is the recognition of lease assets and lease liabilities classified as operating leases under previous GAAP.
There are specific required disclosures as follows:
a) Information about the nature of its leases, including the following:
- a general description of those leases;
- the basis and terms and conditions on which variable lease payments are determined;
- the existence and terms and conditions of options to extend or terminate the lease;
- the existence and terms and conditions of residual value guarantees provided by the lessee; and
- the restrictions or covenants imposed by leases (such as incurring additional financial obligations).
b) A lessee should provide narrative disclosure about the options that are recognized as part of its right-of-use assets and lease liabilities and those that are not.
c) lessee should identify the information relating to subleases included in the disclosures provided in (a.1) through (a.5), as applicable.
d) Information about leases that have not yet commenced but that create significant rights and obligations for the lessee, including the nature of any involvement with the construction or design of the underlying asset.
e) Information about significant assumptions and judgments made in applying the requirements of this topic, which may include the following:
- the determination of whether a contract contains a lease;
- the allocation of the consideration in a contract between a lease and non-lease components; and
- the determination of the discount rate for the lease.
DISCLOSURE REQUIREMENTS FOR THE GIFTS-IN-KIND PROPOSED EXPOSURE DRAFT
The objective of this project is to increase transparency about contributed nonfinancial assets through enhancements to the presentation and additional disclosures.
There are specific required disclosures as follows:
- qualitative information about whether contributed nonfinancial assets were monetized or used; if used, a description of the specific programs or activities in which they were used;
- a description of any associated donor restrictions; and
- the principal market (or most advantageous market) used in the valuation (in addition to disclosures already required under Topic 820).
IS RELIEF FINALLY IN SIGHT?
The FASB has again realized that improvements are required in what needs to be disclosed in the financial statements. In 2018, two ASUs (ASU 2018-13 and 2018-14) were issued that will eliminate certain disclosures in the general-purpose financial statements for fair value measurement and for organizations that have defined benefit plans. These ASUs will be effective for financial periods ending December 31, 2020, and December 31, 2021, respectively. Both footnote disclosures are extremely lengthy, so these ASUs are a step in the right direction.
Also, in August 2018 the FASB issued Statement of Financial Accounting Concepts No. 8 Conceptual Framework for Financial Reporting as amended. This Concepts Statement made amendments to Chapter 3 Qualitative Characteristics of Useful Financial Information. It describes what information the FASB should consider in the notes by describing the purpose of the notes, the nature of appropriate content and general limitations.
Concepts Statements are not part of the FASB Accounting Standards Codification. Rather, Concepts Statements describe concepts that will underlie guidance on future financial accounting practices and in due course will serve as a basis for evaluating existing guidance and practices.
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