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Business and Policy Areas
Business and Policy Areas

FASB Issues New Standard for Not-for-Profit Financial Reporting

August 18, 2016

For the first time in more than two decades, the Financial Accounting Standards Board (FASB) has made significant changes to the not-for-profit financial reporting model.  

On August 18, FASB issued Accounting Standards Update (ASU) 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities. The ASU is effective for annual financial statements issued for fiscal years beginning after December 15, 2017 (FY19 for most colleges and universities). Early adoption is permitted. Following is a summary of the changes included in the standard.

Net assets―The three classes of net assets used currently have been replaced with two classes: those with donor-imposed restrictions and those without. In order to ensure no loss of information, NFPs will be required to provide relevant disclosure about the nature and amounts of donor restrictions on net assets, either on the face of the statements or in the notes. In addition, amounts and purposes of board-designated net assets are required to be presented.

Underwater endowments―Rather than reducing unrestricted net assets for amounts by which endowment funds are underwater, those amounts will be reported within net assets with donor restrictions. In addition, institutions will be required to disclose their policy for spending on underwater endowments and the aggregate original gift amounts of underwater funds, along with the fair value of those funds.

Expiration of capital restrictions―The current option to imply a time restriction that expires over the useful life of an asset, sometimes referred to as the “bleeding-in” method, has been eliminated. Instead, restrictions on capital assets will be released when the asset is placed in service.

Reporting of expenses―An analysis of operating expenses by both their function and nature in a single location―generally in the notes―will be required. Enhanced disclosures about how costs are allocated among functions are also required.

Investment expenses―Investment returns must be presented net of external and direct internal expenses. The current requirement to disclose the amount of netted investment expenses has been eliminated. In addition, NFPs are no longer required to display the investment return components (income earned and net realized and unrealized gains or losses) in the rollforward of endowment net assets.

Operating measure disclosures―Institutions that utilize an operating measure and include governing board designations, appropriations, and similar actions within that measure will now be required to disaggregate and describe them by type (either on the face of the financial statements or in the notes). 

Statement of cash flows presentation―An organization may choose to present cash flows from operations using either the direct or indirect method. For those that choose to use the direct method, the indirect reconciliation is no longer required (but may still be provided if desired).

Liquidity and availability―NFPs will now be required to provide both qualitative and quantitative information about liquidity and availability as follows:

  • Qualitative information that communicates how the NFP manages its liquid resources available to meet cash needs for general expenditures within one year of the balance sheet date.
  • Quantitative information that communicates the availability of the NFP’s financial assets at the balance sheet date to meet cash needs for general expenditures within one year of the balance sheet date. The availability of a financial asset may be affected by its nature; external limits imposed by donors, laws, and contracts with others; and internal limits imposed by governing boards.

Transition―Institutions that choose early adoption must implement all provisions of the standard at the same time. If comparative financial statements are presented, the institution may choose to present the expense analysis and liquidity disclosures for the current year only.

Expanded Definitions―In addition to the reporting changes, FASB took the opportunity to clarify the fact that a grantor should be considered a donor for purposes of determining whether, among other things, net assets received through a grant would be considered to be donor restricted. To accomplish this, definitions in the Master Glossary incorporated the wording, “donors include other types of contributors, such as grantors.” 

Next Steps
Now that the standard has been issued, NACUBO’s Accounting Principles Council will develop examples specific to higher education for use in adopting the standard. 


Sue Menditto
Director, Accounting Policy

Karen Craig