In August of 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-14, Presentation of Financial Statements of Not-For-Profit (NFP) Entities. This amendment of the current standards is the culmination of a multi-year project that aims at improving the usefulness of NFP financial statements. This ASU substantially revises the financial statements for the first time since the mid-1990s.

Phase one resulting in ASU 2016-14 represents the proposed enhancements that generated the most favorable responses. Accordingly, this ASU significantly changes the net asset classification structure on the face of the financial statements, provides for consistency in reporting functional expenses, and provides for enhanced disclosures on short-term demands for cash and availability of resources.

Phase two intends to specifically define the term “operations” and align operational measures of the statement of activities with the statement of cash flows. A substantial time frame may be required for the deliberation of phase two.

Main Provisions

The ASU addresses the complexities of the requirement for using three net asset classes, various deficiencies regarding liquidity transparency and utility, expense presentation inconsistencies, and cash flow presentation limitations. The standard provides for the following requirements for all NFPs:

  • Net asset classifications:
    • Classification of net assets from three classes to two. Essentially temporarily restricted net assets and permanently restricted net assets are collapsed together and named “With donor restrictions.” Unrestricted net assets are named “Without donor restrictions.” The distinction of with or without donor restriction is crucial because donors are considered external to the organization. Neither management nor any governing body can classify monies as “with donor restrictions.”
    • Net asset classification disclosures:
      • An emphasis on how and when net assets can be used regarding purpose and time.
      • Board designated net assets will require additional disclosures of nature and amounts.
    • Underwater Endowments:
      • Accumulated losses formerly were included with unrestricted net assets and now are included within donor restrictions.
      • Polices explaining the Board’s interpretation of how to spend these funds.
  • Expense Reporting:
    • An analysis of expenses by function and nature formerly required only for health and welfare organizations will now be required for all NFPs.
    • The analysis may be presented in the notes, in the statement of activities, or as a separate statement.
    • A description of the methods used for allocation of expenses between program and support functions will be included in the notes to the financial statements.
  • Statement of Cash Flows:
    • Formerly a reconciliation of the direct method of operating cash flows to the indirect method was required if the direct method was used. The reconciliation between methods is no longer required. Either the indirect or the direct method of presenting the statement of cash flows is still allowed.
  • Investment Return:
    • Investment returns will be required to be shown net of investment related expenses. External and direct internal investment expenses must be factored in as part of the investment related expenses.
    • These expenses would include the costs associated with the direct conduct or direct supervision of the strategic and tactical activities involved in producing the investment return.
  • Liquidity and Availability:
    • To address the evaluation of cash management and financial solvency issues, new disclosures are required:
      • Qualitative information on how the NFP is managing its liquid resources available to meet cash needs within one year of the balance sheet date.
      • Quantitative information that conveys the availability of financial assets at the balance sheet date to meet cash needs within one year of the balance sheet date.

Effective Dates

This ASU is effective for annual financial statements issued for fiscal years beginning after December 15, 2017 and for interim periods within fiscal years beginning after December 15, 2018. Effectively this translates into an effective date for audits conducted for fiscal years ending December 31, 2018 and beyond. Early application is permitted.

Next Steps and Additional Resources

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Please join us for our Nonprofit Financial Reporting Seminar on July 13 for more information on this important topic.


By Paul M. Doetsch, CPA, CMA, Partner, pdoetsch@legacycpas.com

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