Two additional changes in the upcoming FASB guidance for nonprofits cover the presentation of return on investments and the classifications of long-lived assets.
The change to reporting return on investments is fairly simple – returns will be reported on a net basis, rather than showing the gross returns and offsetting expenses. The netting is limited to external expenses, and direct internal expenses. Organizations will be allowed to report investment returns in multiple lines, if appropriate, such as from different portfolios, different net asset classes, or operating versus nonoperating returns. Organizations are no longer required to disclose investment expenses or components of their investment return.
FASB’s goal in making this change is to make it easier to compare returns between organizations who manage their investments differently. For instance, those whose investments are handled by staff or outside investment managers report their returns differently from those who use mutual funds and hedge funds, for which the fees are directly embedded in the investment returns.
For long-lived assets, as well as gifts of cash and property for acquiring and building these assets, nonprofits will now use the placed-in-service approach for releasing restrictions on them, unless there are explicit donor restrictions. A long-lived assets and related gifts will move from net assets with donor restrictions to NA without donor restrictions, when the asset has been placed into service.
No longer will there be an option to release the donor-imposed restrictions over the estimated useful life of the asset. Prior FASB guidance allowed this, with the reasoning that gifts of long-lived assets have implied time restrictions that expire as the “economic benefits of the acquired assets are used up” (page 27-28 of the linked document). Going forward, the assets will only be considered restricted if there are explicit restrictions from the donor about the time period or purpose for which the assets may be used.
As with many of the reporting changes being made, FASB’s goal here is to make financial statements from different organizations easier to compare. This, in turn, will make the new classifications of net assets with and without donor restrictions more useful to anyone reading the new financial statements.