Not-For-Profit Financial Reporting Will Be Changing Soon – Are You Prepared?

Whether you are a not-for-profit executive, auditor, board member, donor, or lender, implementation of the new reporting model (ASU 2016-14) will result in significant changes to the way you prepare and analyze annual financial statements.

Some not-for-profits have already adopted the new reporting model. However, all not-for-profit financial statements issued for calendar years ending December 31, 2018 and later will require implementation.

The overall goal of the new reporting model (ASU 2016-14) is to improve the information included in the financial statements and footnotes to allow not-for-profit organizations to tell their story better. The main changes to the new reporting standard include Net Asset Classification, Investment Return, Expense Reporting, the Statement of Cash Flows, and new Liquidity and Availability Disclosures.

The most significant changes are explained below.

Net Asset Classes

The new reporting model will reduce the current three net assets classes (unrestricted, temporarily restricted and permanently restricted) to two net asset classes (with or without donor restrictions).

In addition to the net asset classification reduction, a qualitative disclosure is required to further explain the nature and amount of donor restrictions, as well as the amount, purpose, and type of board designations. The standard provides multiple illustrative examples of how to present the changes.  

It is important to mention the new standard will also change the accounting of underwater endowments (“when the fair value of assets associated with individual donor-restricted endowment funds fall below the level that the donor requires to retain as a fund of perpetual duration”).

Previously, underwater endowments were offset against unrestricted net assets, but the new standard will require an offset against assets with donor restrictions, as well as require enhanced disclosures.

Investment Return

ASU 2016-14 will remove the option of netting investment expenses with investment return or presenting investment expenses as a component of expenses. The new standard will require reporting all external (i.e. amounts paid to third parties such as an investment firm) and direct internal investment expenses (i.e. CFO review of investment portfolio) netted against investment return on the Statement of Activities. Disclosure of the composition of investment return or the amount of investment expense is no longer required.

Statement of Cash Flows

The new standard still allows for the option of the indirect method or the direct method. However, ASU 2016-14 eliminated the requirement for the indirect reconciliation when presenting the direct method. The requirement of the reconciliation for the direct method was removed in part as a compromise between preparers and users of the financial statements. Many users felt the direct method provided more useful information. However, preparers found information was not readily available to prepare the reconciliation.

Expense Reporting

A major change to many not-for-profits will be the new requirement to present expenses by both functional and natural classifications, often referred to as the Statement of Functional Expense.

The basic format of the Statement of Functional Expense lists expenses on the left column of the statement, with program services and supporting services noted as headers at the top of the statement. Not-for-profits will be familiar with the format which is already a required statement included in the IRS Form 990.

In addition to requiring the presentation of expenses by functional and natural classification, guidance on Management and General Expenses is provided. Note disclosure of the method used for allocation is also required. The new ASU provides a few examples of the qualitative description of the methods used for allocation.

Liquidity and Availability of Resources

Possibly the most significant change for not-for-profits will be the new requirement to provide qualitative and quantitative information about the liquidity of the organization. The goal of the new liquidity and availability disclosure is to allow the financial statement user to understand in an easy to read format the availability of assets to be used to meet current cash flow needs.

Qualitative information should illustrate how the not-for-profit manages its liquid available resources and liquidity risk, as well as how the not-for-profit will meet cash needs for general expenditures within one year of the date of the Statement of Financial Position.

Quantitative information required for disclosure would include amounts of available current financial assets of the organization at the financial statement date available to meet cash needs for general expenditures within one year after the financial statement date.

The standard allows for three ways to present the information, including presenting quantitative information on the face of the Statement of Financial Position with qualitative information in the footnotes, quantitative information in a schedule in the footnotes with additional qualitative information, or qualitative and quantitative information in the footnotes without a related schedule.

Fortunately, the new standard provides great examples of each available method.

Preparation for Implementation

Management and the Board should take steps to prepare for the upcoming changes. Management should begin reviewing its donor and board restriction policies in preparation of net asset changes and liquidity disclosures, identify internal and external investment costs that will be netted, discuss if the direct method for the cash flow statement may be more beneficial to the financial statement user, review the methodology to be used for functional and natural classifications of expenses and determine if the methodology can be produced through the current financial system, and ascertain what additional liquidity sources are available to the organization.

The Board should discuss possible additional accounting and audit fees, potential system upgrades, needed internal process changes, and recommend any policy changes.

Final Thoughts

Although the implementation of the new standards will require additional effort by management and the preparers of the financial statements, the changes present an opportunity for the organization. Management and the Board will be able to provide more transparent and readable financial statements to present to donors, grantors, and others who are interested in the financial performance and viability of the organization. Overall, the reporting changes should allow the organization to tell its story better.

Need More Help?

Rivero, Gordimer & Company, a CPA Firm in Tampahas vast experience and knowledge working with nonprofits including National and Local Charites, Private Foundation, Professional Societies, Healthcare Organizations, Schools and Educations Organizations, Religious Organizations, and Membership Organizations. Let us know how we can help.


Brooke Bauerle, CPADennis Paleveda, CPABrooke and Dennis presented the new Not-For-Profit reporting standard (ASU 2016-14) at the Annual Rivero, Gordimer & Company Nonprofit Appreciation Day in November 2017. Both Brooke and Dennis are Audit Supervisors at Rivero, Gordimer & Company.  

About Rivero, Gordimer & Company:

Rivero, Gordimer & Company was formed in 1983 and is headquartered in the Tampa Bay area. The firm serves over 50 local and national not-for-profit organizations. Rivero, Gordimer & Company is proud to have been admitted as an exclusive member of the Nonprofit CPA’s, a nationwide affiliation of independently owned accounting firms committed to delivering exceptional financial and consulting services to not-for-profit organizations.  

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