Restrictions for Gifts

Restrictions for Gifts Used to Acquire or Build Long-lived Assets Under the New Not-For-Profit Standards

By Ben Ripple, CPA

We have included several articles in our newsletters this summer and fall updating you on the effects of ASU 2016-14 for not-for-profit entities. We will continue our deep dive into ASU 2016-14 by looking at one of the lesser talked about, but equally important, parts of the new standard: how to report restrictions on gifts to be used for acquisition or construction of long-lived assets.

Historically, a not-for-profit entity had the option of using two different methods to account for the restrictions for assets received to purchase or build a long-lived asset. The first was a placed-in-service approach that reported the gifts received as restricted until the long-lived asset being built or purchased was placed in service. Once the asset was placed into service, the organization would then release from restriction all donations that had been received to acquire the long-lived asset. The second option available under existing standards involved releasing donor restrictions over the estimated useful life of the long-lived asset. For example, if an organization received $100,000 to buy a piece of equipment with an estimated useful life of 10 years. Then, the organization would release from restriction $10,000 a year starting from the point in time that the equipment was placed in service.

Since there were two options, this led to inconsistencies in practice, which made comparing the financial statements of different not-for-profit entities difficult. The new standard now requires, assuming the absence of explicit donor stipulations, that organizations use the placed-in-service approach to release donations from restrictions. This change simplifies the accounting by removing the need to track releases year after year, and it also makes financial statements more comparable by having everyone use the same method of accounting for these gifts.

As part of adopting the new standard, any gifts for in service long-lived assets that were being released from restriction under the amortized method will be shown as released from restriction at the beginning of the period when the new standard is adopted. This will save organizations from having to restate any prior year financial statements, but it may lead to difficulty when comparing an individual organization’s financial statements year to year. So, if your not-for-profit organization is going to be affected by this change, it would be a good idea to start discussing it with your board and major donors now. That will hopefully eliminate some confusion when the organization suddenly shows a huge increase in net assets without donor restriction as compared to unrestricted net assets under the current standard.

If you have any questions with this change or any other changes that will occur when adopting the new standard, please reach out to your accounting service providers. For full detail of the changes coming with ASU 2016-14, please refer to the standard on the FASB website:

FASB ASU 2016-14

Ben Ripple updated

Benjamin R. Ripple Partner, Assurance Practice Leader, CPA

Ben is a partner in BRC’s assurance services. Since starting his career in 2001, Ben has worked with clients ranging from family-owned companies, to multinational corporations, to nonprofit and governmental entities requiring A-133 audits. Ben’s industry experience includes: Manufacturing and distribution Hospitality, including restaurants and hotels Investment companies Governmental and not-for-profit entities Affordable housing […]