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

Part Two

April 6, 2018
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In the first part of a two-part article, we reported that not-for-profit NFP financial statements are getting a makeover, with NFP organizations being the 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. Part one of this article focused on net assets provisions and part two will discuss some of the other key provisions of the Accounting Standards Update (ASU) 2016-14.

Placed-in-service approach
For donor-restricted gifts, which are restricted for the acquisition or creation of a long-lived assets, NFP’s are currently able to release gifts into unrestricted net assets, as the asset is used up, that are ratably assessed over the useful life of the related asset. The pronouncement will require the use of the placed-in-serve approach, unless the donor explicitly stipulates otherwise. Under the placed-in-service approach the NFP will release the gift into net assets without donor restrictions when the related asset is placed into service. This will have a particular impact on assets in process at the time of adoption.


The recording of the release of net assets under the “placed-in-service approach” versus the current approach can have a significant effect on the change in net assets of an organization. Proper planning and communication between donors and the nonprofit is essential to preventing unwanted results.

Statement of cash flows
NFP’s will continue to be permitted to utilize the indirect or direct method of presenting the statement of cash flows. However if the direct method is elected the ASU no longer requires the presentation of a reconciliation to the indirect method.

Liquidity and availability of resources
Disclosures regarding any limitations on and liquidity of assets are enhanced under the ASU. In addition to providing information regarding the nature of any limitations on the use of cash and cash equivalents this includes disclosures regarding any assets set aside under debt agreements, self-funding agreements, collateral agreements, or reserve requirements. In addition quantitative and qualitative information will be required regarding the availability of financial assets at the balance sheet date to meet the needs for general expenditures within one year of this date. If comparative financial statements are presented in the year of adoption of the ASU, NFP’s have the option to omit these additional disclosures for any periods presented before the period of adoption.

Investment return presentation
To enhance comparability of investment returns across all NFP’s, investment return will be presented net of any external or direct internal investment expenses. Prior to the ASU, NFP’s had the option of reporting investment expenses net against investment return, or gross and reported within expenses. The ASU now requires the net presentation however fees are not required to be disclosed separately. This eliminates the sometimes difficult process of identifying embedded fees.

Analysis of expenses by nature and function
Previously only required for health and welfare entities, all NFP’s will be required to report information about expenses by nature and function in one location, which could be the face of the statement of activities, in the notes to the financial statements, or as a separate statement. The analysis should disaggregate functional expense classifications, such as major classes of program services and supporting activities, by their natural expense classifications, such as salaries, rent, utilities and depreciation. The NFP’s methodology for allocating costs among program and support functions should also be disclosed. If comparative financial statements are presented in the year of adoption of the ASU, NFP’s have the option to omit this analysis for any periods presented before the period of adoption. This analysis could look as follows:

Unrealized gains and losses on equity securities
The ASU eliminates a requirement previously established by ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities for NFP’s to disclose the portion of unrealized gains and losses for the period that relates to equity securities still held at the reporting date.

The FASB’s second phase of the project will address additional matters such as whether operating measures should be required for NFP’s, how to define a measure of operations, and realigning certain items in the statement of cash flows to better align operating cash flows with an operating measure on the statement of activities. 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 with relevant staff and boards or committees.

To discuss the effects of the implementation of this new pronouncement on the financial statements of your organization, please reach out to your relationship partner or email us at info@citrincooperman.com.