Focus on what counts

The Makeover: Changes to Not-For-Profit Financial Statements

Part One

April 6, 2018

Konrad Schweitzer 

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Financial statements of not-for-profit (NFP) organizations are getting a makeover. To enhance the usefulness to its users and overall transparency of NFP financial statements, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-14 as the first of a two-phase project. NFP organizations are most likely to be impacted by the most significant of the changes. These changes will be effective for fiscal years beginning after December 15, 2017. In this two-part article, we will present the key provisions of these new standards, with the first part focusing on net assets.

Net Asset Classification

To reduce complexity, the three current net asset classifications (unrestricted, temporarily restricted, and permanently restricted) will be replaced by two new classes of net assets: those without donor restrictions, and those with donor restrictions.

Donor restrictions are stipulations as to the use of the funds either for specific purposes or activities, or over specific timeframes or at a specified date. Donors can also stipulate funds to be maintained in perpetuity. These new classes however are a minimum. Provided that the total amount for the two classes, as well as total net assets, are reported in the statement of financial position, the ASU permits further separation within these classes, such as making a distinction between net assets with donor restrictions expected to be maintained in perpetuity and those expected to be spent over time or for a particular purpose. This results in the option for a similar presentation prior to the adoption of the ASU with terminology changes.

The internal designation of net assets will still be allowed – for example a board designated endowment fund – and is typically considered part of net assets without donor restrictions. As donor stipulations and laws vary for endowment funds, the NFP must assess all relevant facts and circumstances in determining the proper classification of such funds.

The statement of activities must show the change in each of the net asset classes in addition to the change in total net assets for the period(s) presented.Earnings on donor-restricted endowment funds are still subject to the Uniform Prudent Management of Institutional Funds Act of 2006 (UPMIFA) applicable the state, and are reported as part of net assets with donor restrictions until they have been appropriated for expenditure.

NFP’s will continue to disclose the nature and composition of donor-restricted net assets as well as amounts and purposes of board designations of net assets without donor restrictions, if any.

Underwater donor-restricted endowment funds will see expanded disclosures under the pronouncement. An underwater endowment is donor-restricted endowment fund with a fair value of less than the original gift amount that the NFP is required to maintain. The pronouncement will require the presentation of the accumulated losses with the related fund, rather than a reduction in net assets without donor restrictions. NFP’s also need to disclose their interpretation of its ability to spend from underwater endowments based on the applicable state UPMIFA laws. If any underwater endowments exist, the NFP must also disclose any actions taken during the period, as well as the following, in the aggregate:

  1. The fair value of the underwater endowment funds
  2. The original endowment gift amount or level required to be maintained by donor stipulations or applicable laws
  3. The amount of the deficiencies of the underwater endowments

Underwater portions of endowments are to be included with the related fund within net assets with donor restrictions.

Within the required reconciliation of the beginning to the ending balance of the NFP’s endowment (by net asset class and in total), investment return will be shown net and is no longer required to be separated between investment income and net appreciation/depreciation of the investment.

Part two of this article will discuss some of the other key provisions of the Accounting Standards Update (ASU) 2016-14. As the deadline for implementation of the first phase looms, it is important for NFP’s to understand, evaluate, plan for, and communicate the impact of these changes on its financial statements.

To discuss the effects of the implementation of this new pronouncement on the financial statements of your NFP organization, reach out to your relationship partner or email us at