Written by Patrick Bowman, CPA

On August 8, 2016, the Financial Accounting Standards Board issued new rules for nonprofits, FASB Accounting Standards Update 2016-14, Presentation of Financial Statements of Nonprofit Entities in an effort to make the financial statements more useful to end users. Not only does this make information more useful, but it also alleviates some of the headaches in preparing the financial statements. The new standard simplifies and clarifies a nonprofit entity’s requirements as well as providing a framework for more consistency when it comes to financial reporting.

So, what changes does Update 2016-14 include?

For starters, the classification of net assets at the end of a period have been changed. Nonprofit entities will no longer need to present their classification of net assets into three hard-to-define classes in the Statement of Financial Position:

  1. Unrestricted;
  2. Temporarily Restricted; and
  3. Permanently Restricted.

Instead, net assets will be classified in the Statement of Financial Position as:

  1. With Donor Restrictions, or
  2. Without Donor Restrictions

In addition, these changes apply to the Statement of Activities.

Disaggregation is also required for certain board designations, appropriations or internal transfers either on the face of the financial statements or in the notes. (An example would be contributions designated by the Board for quasi-endowment would be backed out of contributions on the face of the financial statements and reported in items considered to be non-operating).

Under the new standard, nonprofits may continue to present cash flows from operations using either the direct or indirect method. However, nonprofits will no longer be required to present the indirect method reconciliation if the direct method is used.

The new standard also adds requirements for including new disclosures to enhance financial statement data for users of financial statements. The following is a list of disclosures that will be required for nonprofit entities to address once they have adopted the new standards.


Liquidity disclosures must provide qualitative and quantitative information about liquid assets available to meet the cash needs for general expenditures within one year of the Statement of Financial Position date. Availability of a financial asset may be affected by:

  • Nature,
  • External limits imposed by donors, grantors, laws and contracts with others,
  • Internal limits imposed by governing board decisions.

Use of resources

A new enhanced disclosure is required for amounts and purposes of governing board designations, appropriations and/or similar actions that result in self-imposed limits on the use of resources without donor-imposed restrictions. To enhance readers’ understanding of the donor restrictions, footnote disclosures will be required to include the timing and nature of the restrictions, as well as the composition of net assets with donor restrictions at the end of the period. The disclosures will continue to show an analysis by time, purpose and perpetual restrictions.


An analysis of expenses by both function and natural classification will be required for all nonprofits on a separate statement, on the face of the Statement of Activities, or in the footnotes. While a separate Statement of Functional Expenses is not required, it may be the most effective presentation option for nonprofits with more than one program. Additional disclosures will also be required regarding specific methodologies used to allocate costs among program and support functions.


Underwater endowments will now be reflected in the “with donor restrictions” category instead of the “without donor restrictions”. Additionally, the following must be included in the disclosure:

  • The nonprofit’s policy and any actions taken during the period regarding appropriations from the underwater endowment funds;
  • The fair value of the funds;
  • The original gift amount or level required by the donor or law to be maintained; and
  • The aggregate amount by which the funds are underwater.

Investment expenses

Investment return expenses must be reported net of external and direct internal investment expenses and disclosure of those netted investment expenses is no longer required.

Placed-in service-approach

In the absence of explicit donor stipulations, use the placed-in-service approach for reporting expirations of restrictions on gifts of cash or other assets to be used to acquire or construct a long-lived asset. The option to imply a time restriction and release the restriction over an asset’s useful life will no longer be permitted.

Operating measures

Disaggregation required for certain board designations, appropriations, or internal transfers will be required either on the face of the financial statements or in the notes. (An example would be contributions designated by the Board for quasi-endowment would be backed out of contributions on the face and reported in items considered to be non-operating).

While we have not gone into great depth regarding the changes the update will bring, we hope that it provides some guidance and information to help facilitate a discussion with your BMSS auditor. The update is effective for years beginning after December 15, 2017.

Regardless of whether you elect early adoption or wait until the update goes into effect, you must adopt all provisions in the year of adoption. If you have comparative financial statements prepared, you must adopt all provisions for the prior year presentation except analysis of expenses by nature and function, disclosures around liquidity and availability of resources.

If you have any questions about how these rules may pertain to you, please contact your BMSS representative. We are happy to walk you through the complex ins and outs of the new reporting standard as it relates to you and your nonprofit.

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