Implementing the New Financial Reporting Standards

Special to the Philanthropy Journal

By Melissa Harman and Elizabeth Dollar

For the first time in over 20 years, not-for-profit organizations are required to present their financial statements in a different manner. The FASB issued ASU 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities, on August 18, 2016. It enables not-for-profits to better tell their financial story, make financial statements more useful to readers, and provide more consistency in reporting between organizations.

As you begin the implementation of the new standard, it’s a great opportunity to step back and look at the big picture. Take inventory of what policies, procedure, and internal controls need to be revisited to comply with the new standard or just to make reporting easier. This article can be used to help your organization address the new financial reporting requirements.

Net Asset Classification

  • Present two classes of net assets—net assets with donor restrictions and net assets without donor restrictions—instead of unrestricted, temporarily restricted, and permanently restricted on the face of the statement of financial position, and present the changes in these two classes on the statement of activities.
  • Disclose the amount, purpose, and type of board-designated net assets.
  • Classify the underwater amounts of donor-restricted endowment funds in net assets with donor restrictions. The update also requires disclosure of the aggregate fair value of underwater funds, the original gift amount—or amount required to be maintained by the donor or law—and the governing board policy and decisions made to spend, or not spend, from such funds during the year.
  • Use the placed-in-service approach—where donor restrictions are released as assets are placed in service—for gifts of cash or other assets restricted for acquisition or construction of a long-lived asset such as property, plant, and equipment.

Reporting of Investment Returns

  • Net external and direct internal investment expenses against investment return for presentation on the face of the statement of activities.
  • Disclosure of netted amounts is no longer required, except for the disclosure of the amount of internal salaries and benefits that have been presented net against investment return.

Liquidity Information

  • Disclose qualitative information on how the organization manages its liquid resources.
  • Disclose quantitative and qualitative information that communicates the availability of the organization’s current financial assets at the statement of financial position date to meet near-term cash needs for general expenditures.

Expense Reporting

  • Report expenses in one location, either on the face of the statement of activities or in the notes, by their function—which is already required for some entities under existing standards—and natural classification.
  • Provide disclosures about methods used to allocate costs among program and support functions.

Statement of Cash Flows

Organizations may still choose between the direct method and the indirect method; however, disclosure of the indirect method reconciliation is no longer required when using the direct method.

Effective dates

The ASU is effective for fiscal years beginning after December 15, 2017, and for interim periods within fiscal years beginning after December 15, 2018. Early adoption is permitted.

The amendments should be applied retrospectively to all periods presented.

In the year of adoption, not-for-profits should disclose the nature of any reclassifications or restatements and any effects on the changes in their net asset classes for each year that’s presented.

In addition to net asset categories, a not-for-profit must disclose any reclassifications and restatements made as a result of adopting the new guidance and their effects on the changes in net asset classes for each year that’s presented. This disclosure only needs to be made in the period the amendments are first adopted.

However, when presenting comparative financial statements, not-for-profits can elect to omit certain information for periods before the year of adoption. That includes analysis of expenses by both functional and natural classifications, as well as disclosures about liquidity and availability of resources.

How the changes were made

The previous reporting requirements for not-for-profit organizations fell under the FASB’s Statement No. 116 and Statement No. 117, which the FASB issued in 1993.

In November 2011, the FASB announced two projects on their agenda that were intended to improve the financial reporting of not-for-profit entities. The objectives of these projects were based on suggestions received by the board from the Not-for-Profit Advisory Committee, known as the NAC.

The projects’ objectives included standard-setting and research. The aim of the research project was to study communications other than financial statements that not-for-profit entities use to tell their financial story. In 2014, the FASB voted to remove the research project from its agenda.

The standard-setting project moved forward and, in April 2015, an exposure draft was released with the comment period ending in August 2015. In October 2015, the board decided to split the proposed update into two phases.

Are there more changes to come?

The FASB views ASU 2016-14 as phase one—the beginning of guidance to result from its multiyear review of the not-for-profit financial reporting model. In the review, the FASB identified additional, more radical changes as well as controversial proposals that were deferred to phase two.

Such proposals include whether or not and how to define the term operations and align measures of operations—or financial performance—as presented in a statement of activities with measures of operations in a statement of cash flows. As of January 2018, the topics deferred to phase two weren’t on the FASB’s agenda. However, there are two FASB research projects that cover topics similar to those that were included in phase two: The Financial Performance Reporting project and Targeted Improvement to the Statement of Cash Flows project.

The objective of the Financial Performance Reporting project is to consider whether or not to require a measure of operations and how to define a measure of operations for not-for-profit entities and business entities. The objective of the Targeted Improvement to the Statement of Cash Flows project is to reduce existing diversity in practice in how certain cash receipts and cash payments are presented in the statement of cash flows.

Start preparing now

Not-for-profits can prepare for these changes by conducting preliminary discussions on how to best tell their financial story. It’s best to take the time now to speak with those responsible for governance and the board of directors about the required changes, and to determine the optimal presentation of an organization’s financial statements.


Melissa Harman is the National Practice Leader for Higher Education at Moss Adams, and Elizabeth Dollar is the National Practice Leader for Not-for-Profit at Moss Adams.

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