Implementation of ASU 2016-14 Not-for-Profit Entities (Topic 958), Presentation of Financial Statements of Not-for-Profit Entities

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Now that the nonprofit reporting standard has been issued in its final form, it’s time to think about implementation.

Transition Guidance

The update is effective for annual financial statements for fiscal years beginning after December 15, 2017, which means calendar year 2018 and after. Earlier adoption is permitted. The provisions should be applied on a retrospective basis to all prior years presented. However, when presenting comparative financial statements for periods prior to adoption, the following may be omitted from the prior period financial statements presented:

  • Analysis of expenses by both natural and functional classification, unless previously required under the old standard for voluntary health and welfare organizations.
  • Disclosures about liquidity and availability of resources

In the period that the update is applied, the nonprofit should disclose the nature of any reclassifications or restatements and their effects, if any, on changes in the net asset classes for each period presented.

Implement Early or Not?

That decision is ultimately the responsibility of management.  Some nonprofits may want to wait until the required adoption date as interpretations could be issued between now and the effective date. Also, as we get closer to the required implementation date, more financial statement examples will be available to assist in implementation.

Other nonprofit organizations may decide to implement early to be on the cutting edge.

So far we have not seen any financial statement users such as banks or grantors request early adoption. We can support either decision, and have studied the standard sufficiently and are prepared for early adoption should you make that choice.

Additional Disclosures

In order to help decide when to implement the new standard, let’s identify the additional disclosures and information that will be required:

  • Expenses reported in a matrix format, with natural categories (salaries, rent) as rows and functions (program services, management and general and fundraising) as columns. Note that this information has been required to be reported on Form 990 by public charities for years, so this may not be difficult to produce.
  • Disclosure of what types of expenses are allocated between functions and what allocation bases are used to allocate such expenses. For example, occupancy expenses may be allocated between functions based on square footage. Since the allocation method is now required to be disclosed, nonprofits may want to reexamine their allocation methods.
  • For “underwater” endowments, rather than just reporting the net underwater  amount, the standard requires disclosing the total historic dollar value of all endowment gifts and the fair value of the related investments, so readers can more easily gauge the relative magnitude of the underage.
  • In situations when there are “underwater” investments, disclosure of management’s interpretation under state law, of the ability of the nonprofit to spend from underwater endowment funds, and any actions taken during the period concerning appropriation from underwater endowment funds is required.
  • Disclosure of the amounts and purposes of board designations of net assets without donor restrictions is required. While most nonprofits are already reporting the amounts, some nonprofits are not disclosing the purpose of each designation.
  • Disclosure of qualitative information in the notes to the financial statements that is useful in assessing the nonprofit’s liquidity and that communicates how the nonprofit manages its liquid resources available to meet expenditures within one year from the statement of financial position (SOFP) date is required. This would include, but not be limited to, a policy of maintaining a certain balance in cash, the existence of lines of credit or other resources, and any board designated operating reserves.
  • Disclosure of quantitative information that communicates the availability of the nonprofit’s financial assets at the SOFP date to meet cash needs for general expenditures within one year from the SOFP date is required. The update notes that the availability of a financial asset may be affected by 1) its nature; 2) external limits imposed by donors, laws, and contracts with others, and 3) Internal limits imposed by the board of directors. In the example notes to the financial statements we have reviewed, most provide a listing of the financial assets that are available for general expenditures for the subsequent year. If the nonprofit has an endowment, the spending plan would be disclosed if endowment income is not restricted. If there is a board designated endowment, the spending plan would be disclosed, along with the power of the board to undesignate the board designated endowment if considered necessary.

So Many Choices

Once the decision to implement is made, the next step is to determine which of the many presentation alternatives to use. Examples include:

  • Presenting the two net asset categories on the face of the SOFP, with the details in the notes to the financial statements, or providing restriction details on the face of the SOFP.
  • Presenting the natural/functional expense matrix in the notes to the financial statements versus a separate statement of functional expenses..
  • Releases of restrictions – can be shown on one line in the statement of activities (SOA) as is currently done, with the detail in the notes to the financial statements, or providing release detail by type on the face of the SOA.
  • Cash flows – the indirect method currently in place is still allowed. The update permits use of the direct method. The direct method can include a reconciliation of the change in net assets to cash flows from operating activities, but the reconciliation isn’t required.
  • Special events – can continue to be handled with the revenue in the revenue section of the SOA, and the related expense in the expense section of the SOA, or can show the direct cost of the event as a reduction of special event revenue in the revenue section of the SOA. A third option is to bifurcate the transaction between contributions, and event, the contribution part included with other contributions, and the event revenue reported as another revenue line item, offset by the event expense. The new revenue recognition standard, effective for calendar 2019, may ultimately require this treatment.
  • Reporting expenses in the SOA – as long as there is a natural/functional expense matrix in a note to the financial statements or in a statement of functional expenses, there are many options for reporting expenses in the SOA. A Nonprofit can report either by natural category or functional category, with or without subtotals for program services and supporting services or not.


Your engagement team will be discussing the new standard with you to determine when you would like to adopt, as well as the various reporting alternatives. Feel free to call us with any questions concerning the new standard.

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