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Business and Policy Areas
Business and Policy Areas

FASB Prepares for NFP Reporting Changes

April 18, 2016

Over the past five months, the Financial Accounting Standards Board (FASB) has been deliberating on comments received to its proposed Accounting Standards Update (ASU), "Presentation of Financial Statements of Not-for-Profit Entities," issued in April 2015.

In October, the Board decided to divide its deliberations into two phases. Decisions on Phase 1 topics have been made, and FASB staff are drafting an ASU that various constituents, including NACUBO, will review for "fatal flaws" by April 29. The final clearance by the Board is expected to result in an ASU by June 30. 

The NFP financial statement project has been a multi-year effort to improve financial statement display and the understandability of NFP financial performance. A new standard will change the way independent colleges and universities have been reporting since the mid-1990s. After receiving 264 comment letters, FASB elected to defer controversial elements of its exposure draft and address items that NFP stakeholders appeared to coalesce around (via both the letters and public feedback venues).

The Board has reached several decisions that will be reflected in a lengthy June 2016 ASU. The paragraphs below highlight what business officers can expect in the ASU, which will be effective in financial statements for fiscal years beginning after December 15, 2017—or FY19 for the vast majority of colleges and universities.

Net asset classification

Two net asset classes—with and without donor restrictions—will be required. The "with donor restrictions" net asset class combines the current categories of temporarily and permanently restricted net assets. Relevant information about the nature and amounts of donor restrictions will be required either on the face of the statement of financial position or in the notes.

Disclosure of amounts and purposes of board designations

The final ASU will require the disclosure of the amounts and purposes of board-designated net assets either on the face of the financial statements or in the notes.

Classification and disclosure of underwater endowments

The aggregate amount by which endowment funds are underwater will be classified within net assets with donor restrictions rather than the current unrestricted net asset category. NFPs will also have to disclose their underwater spending policy, the aggregate fair value of underwater funds with the aggregate amount of deficiencies, and either the aggregate original gift amount or amount required to be maintained by donor stipulations or relevant law.  

Gifts for capital assets

In the absence of explicit donor instructions, long-lived assets acquired or constructed with donor gifts will be released from restriction when the asset is placed in service. This requirement eliminates the overtime approach (also known as the "bleeding in" overtime approach).

Operating cash flows

Although NFP entities can continue to use either the direct or indirect cash flow reporting method, the indirect reconciliation will no longer be required if an NFP chooses to use the direct method.

Operating measure disclosures

NFPs that display an operating measure will be required to explain governing board designations, appropriations, and similar actions contained within the operating measure. The description of such actions can be either on the face of the financial statements or in the notes.

Investment expenses

NFPs will be required to net external and direct internal investment expenses against investment return but will no longer be required to disclose investment expenses (external or internal) that are netted against the return. The final standard will include examples and guidance to illustrate the types of activities that can comprise direct internal investment expenses.  

Expenses by nature and function

The current requirement to report expenses by their functional classification either on the statement of activities or in the notes to the financial statements is retained. However, an analysis that shows the relationship between functional and natural classification will be required-either on the face of the statement of activities, in a separate statement, or in the notes to the financial statements.

Additionally, NFPs will have to provide enhanced disclosures about the method(s) used to allocate costs among program and support functions. The definition of management and general activities will be clarified to better depict the types of costs that can be allocated among program and/or support functions and those that should not be allocated.

Liquidity and the availability of resources

The availability of a financial asset may be affected by its nature, external limits imposed by donor laws, contracts with external parties, and internal limits imposed by governing board decisions. Consequently, NFPs will need to provide the following:

  1. Qualitative disclosures that explain how liquid resources available to meet cash needs for within one year of the balance sheet date are managed.
  2. Quantitative information, either on the face of the balance sheet or in the notes, augmented by qualitative explanation in the notes as necessary, that communicates the availability of financial assets at the balance sheet date to meet the NFP's cash needs for one year from the balance sheet date.


Sue Menditto
Director, Accounting Policy