United States

Not-for-profits: Important changes ahead


On August 18, 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities, representing the first time since the mid-1990s that financial reporting for not-for-profit organizations has been addressed. While the guidance is effective for fiscal years beginning after December 15, 2017, early adoption is allowed. The key elements of the ASU are as follows:

  • Net asset classifications are being reduced from three to two categories: with donor restrictions and without donor restrictions. Expanded disclosures about the nature and amount of any donor restrictions will be required. Expanded disclosures on any board designations of net assets without donor restrictions will also be required.
  • Underwater donor-restricted endowments will be included in “with donor restrictions.” There will be enhanced required disclosures for underwater endowments, including disclosure of policies for reducing or ceasing spending from such endowments, the aggregate fair value, the aggregate original gift amount or level required to be maintained by donor or law, and the aggregate amount of any deficiencies.
  • The placed-in-service approach will be required for determining when restrictions are met for all capital gifts, eliminating the over-time option for expirations of capital restrictions.
  • Additional disclosures, both qualitative and quantitative, will be required to communicate information useful in assessing liquidity within one year of the balance sheet date.
  • Enhanced disclosures will be required for organizations that present an operating measure.
  • The indirect or direct method of presenting the statement of cash flows will be allowed. However, the reconciliation of operating items no longer will be required when using the direct method.
  • When an organization derives net investment return from several different sources, such as donor endowments and unrestricted operating endowments, it may present the net investment return in multiple line items in the statement of activities. Higher education institutions no longer will be required to present “other investment portfolio” investment returns separately from other components of investment return. The components of net investment expense no longer will be required to be disclosed; however, organizations may continue to include this information when their financial statement users have an interest in that information.
  • Several new reporting requirements related to expenses are included, as follows:
    • Disclosure of expenses by both nature and function (excluding investment expenses that have been netted with investment return)
    • Disclosure of expenses netted with investment return ­
    • Enhanced disclosures regarding cost allocations
  • ASU 2016-14 eliminates the requirement to disclose the unrealized gains and losses for the period related to equity securities held at the report date as previously required by ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.

ASU 2016-14 represents the first phase of an expected two-phase project to improve financial reporting by not-for-profit organizations. Currently the FASB intends for Phase 2 to address issues not decided in Phase 1, including the presentation of an operating measure. For example, the FASB is expected to address whether an intermediate operating measure should be presented, and if so, what should be included and (or) excluded from that measure. As noted on the FASB’s project page, Phase 2 will “involve reconsideration of other proposed changes that are likely to require more time to resolve because they involve consideration of alternatives suggested by stakeholders that the Board [FASB] did not previously consider or that are related to similar issues being addressed in other projects.”

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