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The Financial Accounting Standards Board (“FASB”) recently released its first update to the
financial reporting rules for nonprofits since 1993. The new Accounting Standards Update
(“ASU”) No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements
of Not-for-Profit Entities, is intended to increase the transparency and usefulness of financial
reporting information presented by organizations. The FASB says that applying the standard will
also:

 Reduce cost and complexity for nonprofits when classifying net assets,
 Provide more relevant information on how imposed limits on resources (for example,
board designations) affect the availability of those resources,
 Make comparing expenses and investment returns between nonprofits easier, and
 Provide greater transparency about organizations’ service efforts and ability to continue
providing services.

This new ASU will affect the financial statements of most nonprofits when it takes effect. So
now is the time to get ready for the coming changes.

Changes In Net Asset Classes

The new standard consolidates the current net asset classes (unrestricted, temporarily restricted
and permanently restricted) into net assets with donor restrictions and net assets without donor
restrictions. It also requires additional disclosures related to board designations and donor-
imposed restrictions, such as:

 Funds earmarked for a specific purpose,

 The passage of time (for example, when the funds may be used only after a specific
number of years have passed),
 The funds included in board-designated operating reserves, or
 The occurrence of a specific event — for example, the attainment of a desired
programmatic outcome.

The ASU changes the reporting of “underwater” endowments whose fair value is less than the
original gift amount. It now requires the underwater portion to be classified as net assets with
donor restrictions, and enhanced disclosures will be required.

The new standard also generally eliminates the over-time method for reporting the expiration of
restrictions on capital gifts used to purchase or build long-lived assets such as buildings. Unless
the gift includes additional donor restrictions, you must use the placed-in-service approach to
reclassify these gifts as net assets without donor restrictions in the year the asset is placed in
service, rather than spreading out the expiration of the restrictions over the asset’s useful life.
This could affect debt service ratios and other loan covenants.

Liquidity and Available Resources Reporting

Under the ASU, your financial statements must include certain qualitative and quantitative
disclosures of information to help the financial statement user evaluate your organization’s
liquidity. The quantitative information, which will show the availability of your financial assets
to meet cash needs for general expenses within the year following the balance sheet date, is now
required in a more specific format. The newly mandated qualitative information will show how
you plan to manage liquid available resources to meet cash needs for general expenses within a
year of the balance sheet date.

The qualitative disclosure requirements might prove among the most challenging to implement
because they call for a high degree of judgment. But the standard gives you a lot of flexibility
and includes examples of disclosures (although you aren’t required to replicate the format used
in the examples).

Expenses and Investment Return

The ASU also requires you to classify expenses by both nature and function in one location
(function was already required) and present an analysis of expenses by both nature and function.
“Nature” refers to expense categories such as salaries and wages, rent and utilities. “Function”
primarily means program services and supporting activities, such as management and general
and fundraising. This information is already required on IRS Form 990, “Return of Organization
Exempt From Income Tax,” so you shouldn’t have trouble collecting it.

You must present investment income net of all related external expenses (expenses paid to third
parties such as investment managers) and direct internal expenses. The new standard also
eliminates the current requirement to disclose the components of net investment income.

Presenting Operating Cash Flows

The FASB had previously proposed requiring nonprofits to use the direct method to present the
net amount of operating cash flows. But, the new standard lets you opt for either the direct or
indirect method. If you opt for the direct method, you won’t need to include an indirect method
reconciliation, as is currently required.

What Should You Do Next?

The FASB doesn’t expect ongoing compliance costs to be significant for most nonprofits. Even
your initial costs should be manageable, as changes to your financial reporting will require only a
one-time reformatting. But, it may take some time to familiarize stakeholders, such as the board
of directors and management, with the requirements and changes to how information is
presented. You might want to revise a recent set of financial statements according to the ASU
and share them with your board and management teams to help them understand the changes to
come.

Effective Date

The new standard takes effect for annual financial statements issued for fiscal years beginning
after December 15, 2017, and for interim periods within fiscal years beginning after December
15, 2018. Early application is allowed.

What You Need to Know About Nonprofit

Accounting in 2018
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The last few years have seen seemingly endless accounting updates, and nonprofits are facing a
series of implementation deadlines in 2018 and 2019. Will your organization be ready?

To help you prepare, we’ve compiled need-to-know information about the most significant
updates from the Financial Accounting Standards Board (FASB), along with guidance on steps
to take now.

Nonprofit Financial Reporting

The most far-reaching (and imminent) changes come as a result of the FASB’s multiyear project
to revamp how nonprofits present their financials.

Accounting Standards Update No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of
Financial Statements of Not-for-Profit Entities, takes effect for annual financial statements
issued for fiscal years beginning after December 15, 2017, and for interim periods within fiscal
years beginning after December 15, 2018. Early application is allowed.

This ASU is intended to provide improved information about nonprofits’ performance to donors,
creditors and other stakeholders. It does so by presenting net assets in two classes instead of
three, changing the classification of net assets and information presented in the financial
statements and footnotes about an organization’s liquidity, financial performance and cash flows.
As a result, stakeholders should find it easier to understand how nonprofits manage their funds.

Our thoughts: We believe this model of financial reporting will enable nonprofits to better tell
their financial story. However, implementation will be challenging, as this ASU represents a
conceptually different approach to how information is presented in financial statements. Keep in
mind that certain financial statement users, such as your board of directors, may need formal
training to understand the new ways in which information is presented.
Revenue Recognition
Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers, takes
effect for most nonprofits in annual reporting periods beginning after December 15, 2018.

The guidance adopts the core principle that revenue should be recognized when customer
performance obligations are met. The rule affects every nonprofit entity with earned income or
“exchange transactions,” such as tuition, memberships, subscriptions and royalty agreements. A
recent FASB exposure draft would further clarify when grants constitute exchanges vs.
contributions.

Our thoughts: This update is a complete overhaul of revenue recognition rules and will require
significant time and resources for implementation. We have compiled eight steps to prepare for a
smooth revenue recognition transition, starting with an inventory of your revenue streams and an
understanding of your performance obligations.

Lease Accounting
Accounting Standards Update 2016-02, Leases, takes effect for nonprofits and other nonpublic
companies for fiscal years beginning after December 15, 2019.

The update will significantly change the way nonprofits account for leases on everything from
vehicles to real estate to office equipment. Currently, operating leases are considered to be off-
balance-sheet. Moving forward, those leases will need to be recognized on the face of the
balance sheet (not just in the footnotes). The FASB’s stated goal is to increase transparency and
comparability among organizations.

Our thoughts: While straightforward leases of real estate and vehicles won’t present too much
of a challenge, complex judgment calls may be required for certain types of contracts. To get
ready for this standard, consider the following steps:

 Develop an inventory of all lease agreements—including service arrangements and third-

party outsourcing contracts.
 Understand the key provisions of each type of agreement.
 Note any debt covenants or contracts that are based on financial metrics. For example,
debt-to-equity covenants and compensation agreements based on a change in net assets
may need to be renegotiated, since the proposed changes could significantly change those
metrics.

We can help
The updates mean a lot of work for nonprofit finance professionals, but you don’t have to go it
alone. The Armanino nonprofit accounting team stands ready to answer your questions and
alleviate concerns about these and other nonprofit accounting updates.
FASB’s New Financial Reporting Rules for
Nonprofit Organizations | What You Need to
Know
September 14, 2016 By Ed Mulherin | Posted in: FASB | Accounting

Printer-friendly version

On August 18, 2016, the Financial Accounting Standards Board (FASB) issued new rules for
nonprofits: “Accounting Standards Update 2016-14 “Not-for-Profit Entities (Topic
958), Presentation of Financial Statements of Not-for-Profit Entities.” This is the first major set
of changes to nonprofit financial statement presentation standards since 1993. The new rules
take effect for fiscal years starting after December 2017.

What are the goals of the new rules?

The FASB’s goals for the new rules are to provide better information to donors, grantmakers,
creditors, and others who read nonprofit financial statements. The new rules will improve how a
nonprofit organization can tell its story through its financial statements. FASB hopes the
changes will improve the usefulness of nonprofit financial statements and/or reduce complexities
and costs of financial reporting.

What organizations are affected by the new guidance?

The new rules affect substantially all nonprofit organizations, including charities, foundations,
private colleges and universities, health care providers, cultural institutions, religious
organizations, and trade associations, among others. Chances are, if your nonprofit has audited
financial statements, these rules will apply to the presentation of your nonprofit’s financial
statements. If your organization doesn’t require an audit, the rules would still apply to a Review
engagement and any financial statements that are required to be prepared in accordance with
Generally Accepted Accounting Principles (GAAP). (If you are not sure whether the law
requires your nonprofit to have an independent audit, then visiting the Council of Nonprofits’
free online 50-state map with links to state regulations may be useful.)

What do the new rules do?

The new rules address the following issues:

1. Simplify and clarify

The new rules simplify the treatment of net assets in financial statements by focusing on the
existence or absence of donor imposed restrictions, as opposed to the types of restrictions (i.e.,
temporarily restricted vs. permanently restricted). The classification of temporarily restricted
versus unrestricted assets has long been an area of confusion. Under the new rules the Statement
of Financial Position will only have two classes of “Net Assets” – net assets with donor
restrictions, and net assets without donor restrictions. The footnotes will also be changed to
explain these classifications.

The new rules also replace the current three required classes of net assets (unrestricted,
temporarily restricted, and permanently restricted) with two new classes (those with donor
restrictions and those without donor restrictions). The goal of this change is to simplify keeping
track of donor imposed restrictions. Other advantages of this change are that the financial
statements will now also provide more useful information about the nature, amounts, and types
of donor restrictions. Nonprofits will still have to track net assets and follow any restrictions
imposed by donors; however, there is no longer a requirement to distinguish between temporarily
and permanently restricted net assets. Instead, new disclosure requirements will allow nonprofits
to provide more useful information about limits placed on net assets by both boards and donors.
Time will tell whether the guidelines actually accomplish the goal of simplification and clarity.

2. Clarify cash on hand/available assets

The new rules require quantitative and qualitative information to explain how an organization
manages its liquid resources available to meet cash needs for general expenditures within one
year of the balance sheet date. The requirement for qualitative information will be satisfied by
“classified” presentation on the statement of financial position (i.e., a breakdown of current and
non-current assets and liabilities). The requirement for quantitative information will be satisfied
by disclosure of whether or not a financial asset’s availability is limited by a.) its nature, b.)
external limits imposed by donors, grantors, laws or contracts, or c.) internal limits imposed by
governing boards. The idea here is to inform the reader of the financial statements about any
limitations on the use of liquid assets (typically cash and investments) by the nonprofit.
Nonprofit managers should be ready to discuss these restrictions with their CPA performing the
audit or review engagement.

3. Ensure consistency in the reporting of investment expenses and investment returns

The new rules require investment income to be reported net of related internal and external
investment expenses (this is currently optional), but also eliminate the related requirement to
disclose the amount of those netted investment expenses. The result of this change is not only a
consistent presentation across nonprofit entities, but also it gets rid of the difficulty and costs
associated with identifying embedded investment fees in the investment returns used by some
nonprofits, such as mutual funds and hedge funds. Despite this change, nonprofit leaders should
continue to make sure they are aware of the amount paid by the nonprofit for investment
management fees.
4. Correct misunderstandings about the statement of cash flows and related presentation
options

The new rules continue to allow nonprofits the freedom to choose to present operating cash
flows using either the direct or indirect method (whichever method best serves the informational
needs of those reading the nonprofit’s financial statements). However, the new rules eliminate
the requirement to present or disclose the indirect method in the notes if the direct method is
presented on the statement of cash flows. The result is anticipated to be a more useful statement
of cash flows and a reduction in costs to prepare the financial statements. (Many organizations
have avoided the use of the direct method because it essentially increased the cost of preparing
and auditing the financial statements.)

Why do these changes matter?

These changes will not materially affect how nonprofit finance teams handle underlying
transactions; but staff will need to be ready to explain the difference in the look of the financial
statements they present to the board and grantmakers. Also board members will need some
training on the new rules as they pertain to their particular organization’s financial statements.
Consider asking your nonprofit’s auditor to explain the impact of the new rules to your board of
directors.

When are the new FASB standards effective?

There is still plenty of time before the new rules go into effect. Talk to your auditor about the
potential impact on audited financial statements. The new standards apply to annual financial
statements issued for fiscal years beginning after December 15, 2017. Early application is
permitted. Note: There is a “phase two” planned when FASB will address a variety of other
issues affecting nonprofits, but new guidance is not expected for quite some time.

New Accounting Standards for Nonprofit Organizations

August 30, 2017

Morris Zlotowitz, Kimberly Hastings and Arcy Olguin

Key Takeaways

The new rules will challenge nonprofits to become increasingly transparent about their financial
performance and condition.

 The new rules will challenge nonprofits to become increasingly transparent about their financial
performance and condition.
 The new rules will result in streamlined, consistent and transparent reporting among nonprofit
organizations. This will allow organizations to better share their stories—both financially and
 operationally. Additionally, the new rules will press organizations to provide insights into their
programs and supportive services.
 The key provisions of the new standards include:
o Simplified net asset classes
o Updates to the presentation of investment returns, functional expense reporting, and
cash flows from operating activities using the direct method, and
o The addition of liquidity and available resource information.

As many of you may remember, last summer the Financial Accounting Standards Board (FASB)
issued Phase 1 of new guidance on financial reporting requirements for nonprofit organizations –
ASU 2016 -14, Presentation of Financial Statements of Not-for Profit Entities. This project
began taking shape after FASB formed its Not-for-Profit Advisory Committee (NAC) back in
2009, partially in response to practitioners’ frustration with the lack of fungibility and the
amount of restricted money in many of the nonprofit organization revenue streams. The new
standards, which are effective for annual financial statements beginning after December 15,
2017, and for interim periods within the fiscal year beginning after December 15, 2018, will
challenge nonprofit organizations to present their financial statements in a more conventional
and transparent way. As a result, donors, grantors, creditors, and other financial statement users
and stakeholders should find it easier to assess a nonprofit’s resources and the changes to its
resources.

Many experts believe the new guidelines will also provide more clarity within nonprofit
organizations for those who must sift through financials for management and governance
purposes. “While the current not-for-profit financial reporting model held up well for more than
20 years, stakeholders expressed concerns about the complexity, insufficient transparency, and
limited usefulness of certain aspects of the model,” observed FASB Chair Russell Golden, when
the new guidance was issued on August 18 of last year. Golden added at the time that the new
guidance would simplify and improve “the face of the financial statements” and enhance the
disclosures in the notes. As a result, nonprofit organizations should be better able to
communicate their financial performance and condition to their stakeholders.

A wide variety of non-profit organizations will be affected by the new FASB rules including
public charities, foundations, colleges, universities, health care providers, religious
organizations, trade associations and cultural institutions, among others. The key provisions of
the new standards include:

 Simplified net asset classes,

 Updates to the presentation of investment returns, functional expense, and cash flows from
operating activities, and
 The addition of liquidity and available resource information.

Again, the standards are effective for annual financial statements beginning after December 15,
2017, and for interim periods within the fiscal year beginning after December 15, 2018. For
some of the new provisions, organizations can implement certain changes during current year
reporting without triggering early adoption. This phased approach may be preferable to ease the
burden of transition and will allow the nonprofit organization some flexibility in determining the
best presentation for their financial statement users.
The full standard is 270 pages (view it here), but here are some important highlights of the
standard that you should be aware of:

 Net asset classification and disclosures will be simplified. Net assets classes will be limited to
two classes (down from three) when the new standard is implemented and will include net
assets with donor restrictions and net assets without donor restrictions. Further,
o For endowments that are valued at less than the original gift amount (Underwater
Endowments), the asset will be classified within net assets with donor restrictions.
Disclosures pertaining to Underwater Endowments must include the original amount of
the gift and the organization’s policy about how the funds are to be spent.
o Enhanced disclosures for board-designated net assets without donor restrictions will be
required and will address the amounts and purpose of any board designations or
appropriations resulting in self-imposed limits on the use of net assets without donor
restrictions.
o Organizations will still be required to report changes in total net assets for the period,
but now they must report for each of the two classes of net assets in the statement of
activities. For many organizations, this will represent a streamlined presentation on the
face of the statement of activities.

 Investment return is required to be presented net of all related external and direct internal
expenses on the statement of activities. The current requirement to disclose the amount of
netted expenses is eliminated.
 Nonprofit organizations will be required to report expenses, either on the face of financial
statements or in the notes, by function and natural classification. In addition, disclosures about
specific methodologies used to allocate costs among program and support functions will be
required.
 Organizations will continue to have a choice in the presentation of cash flow information best
suited to their users - either the indirect or direct method may be used. However, the indirect
reconciliation will no longer be required when using the direct method.
 Quantitative and qualitative information about the organization’s liquidity will be required,
including an explanation of how an organization will manage its liquidity risk in the coming year.
This allows the organization to expand information about upcoming general expenditures and to
outline resources available to meet operational needs.

The new standard represents a step in the right direction to ensure user-friendly and transparent
financial statement reporting among nonprofit organizations. There is a real opportunity here for
nonprofit organizations to increase user understanding of their operations both on the face of the
financial statements as well as through enhanced disclosure.

NOTE: If your organization wants to implement the new standard for the calendar year 2017,
you can do so for many of the provisions and take 2017 as a “mock period.” Organizations are
also able to early adopt the full standard, which requires a full retrospective approach, although
the standard does allow for certain omissions of comparative information (such as with the
functional expense schedule and required liquidity information).
For public practitioners, this implementation may seem daunting to your clients, so take this
opportunity to work with management to put a plan in place focusing on the following aspects of
the new standard:

1. It’s an update, not an overhaul. The goal is to improve how nonprofit organizations
communicate their financial performance and condition.
2. Reporting will be improved. Whether through streamlined net asset classification or inclusion of
functional expenses detail, financial statements will be more transparent and meaningful for the
users. The focus will be on enhanced disclosure to provide information on net asset restrictions,
liquidity, and key organizational policies.

Conclusion
In light of the significant reporting and disclosure changes involved, preparers and auditors who
work with—or within—nonprofit organizations should start preparing for these changes
now. Some of the new disclosures, such as those regarding liquidity and availability, may
involve a learning curve for managers, board members, lenders and others who rely on the
financial statements. Other disclosures, such as the required disclosure of board designations on
net assets, may require nonprofit organizations to adopt new policies and practices. The FASB
has planned for a Phase II, which will address a variety of other issues affecting nonprofit
organizations; however, the new guidance is not expected for quite some time.

If you or a professional colleague is concerned about the impact of the new FASB rules on
nonprofit organizations, please don’t hesitate to contact us today.

About the Authors

Morris Zlotowitz is an audit partner based in HCVT’s West Los Angeles, CA office. Morris has
over 25 years of experience providing audit and accounting services to private companies and
nonprofit organizations, including private foundations, public charities, and other exempt
organizations. Morris.Zlotowitz@hcvt.com, 310.566.1933

Kimberly Hastings is an audit principal based in HCVT’s Encino, CA office. Kim has more
than a decade of experience providing audit services to clients in the nonprofit, real estate, and
affordable housing industry sectors. Kimberly has extensive knowledge performing audits of
nonprofit organizations funded with federal grants that must comply with Uniform Guidance
requirements and with affordable housing projects with tax credit incentives and HUD
financing. Kimberly.Hastings@hcvt.com, 818.849.3144

Arcy Olguin is an audit principal based in HCVT’s Pasadena, CA office. Arcy has over 17 years
of experience providing audit services to clients in the nonprofit, real estate and affordable
housing industry sectors. Arcy has extensive knowledge in performing audits of nonprofit
organizations, including those funded with federal grants that must comply with the Uniform
Guidance requirements. Arcy specializes in auditing affordable housing projects financed with
tax credits and tax-exempt bonds, including those subject to HUD audit
requirements. Arcy.Olguin@hcvt.com, 626.463.7200
About HCVT
Founded in 1991, HCVT is one of the fastest-growing CPA firms in the nation. The firm
provides provide tax, accounting, business management and mergers & acquisition services to
private companies, closely-held businesses, public companies and high net worth individuals and
family offices. The firm’s over 500 members, including over 100 partners and principals, work
from eight offices in Southern California with additional offices in Walnut Creek, California,
Fort Worth, Texas and Park City, Utah.