Financial Statements of Not-For-Profits: Changes to Net Asset Classifications (Part II)

Financial Statements of Not-For-Profits: Changes to Net Asset Classifications (Part II)

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By Eric D. Turner, CPA | Business Assurance & Advisory Services Senior Manager | Not-for-Profit Team

Welcome back to Keiter’s series on ASU 2016-14, Not-for-Profit Entities (Topic 958), Presentation of Financial Statements of Not-for-Profit Entities.  This article is Part II of our discussion on the changes to net asset classifications.


Changes to Net Asset Classifications

A new FASB ASC Master Glossary definition has been created for board-designated net assets:

Net assets without donor restrictions subject to self-imposed limits by action of the governing board.  Board-designated net assets may be earmarked for future programs, investment, contingencies, purchase or construction of fixed assets, or other uses.  Some governing boards may delegate designation decisions to internal management.  Such designations are considered to be included in board-designated net assets.

Additionally, the new standard introduces new disclosure requirements of quantitative and qualitative information for board designations on net assets.  The disclosures can be made in tabular format on the face of the Statement of Financial Position or through text disclosure as part of the notes.  The key is to disclose the purpose of any board-designated net assets, such as a quasi-endowment or an operating reserve, and the expected timing of use if it is not inherently clear from the purpose.  Given the emphasis over this area, most entities will need to update their internal policies and practices regarding board-designated net assets, even if there currently aren’t any designations.  Below is a sample text disclosure in the notes to the financial statements:

Net Assets Donor Restrictions - Nonprofit CPA


ASU 2016-14 also changes the disclosures related to the donations of, or contributions restricted for the purchase of, property and equipment.  The new standard removes the option allowing an entity which received such a donation or contribution to imply a time restriction for property and equipment, unless there are explicit donor stipulations.  Also, entities are no longer allowed the option to release the donor-imposed restriction over the estimated useful life of the asset.  Instead, the standard requires the use of the placed-in-service approach, meaning the entity will report the release of restrictions when the asset is placed into service.  In the year of adoption of ASU 2016-14, an entity will need to reclassify amounts from net assets with donor restrictions to net assets without donor restrictions for any long-lived assets that have been placed in service as of the beginning of the period of adoption.

The last key change for net assets classes under the new standard is reporting for underwater endowments.  The new FASB ASC Master Glossary definition for underwater endowment reporting is:

Donor-restricted endowment fund for which the fair value of the fund at the reporting date is less than either the original gift amount or the amount required to be maintained by the donor or by law that extends donor restrictions.

The major change in this area is that the underwater portion is no longer reclassified as unrestricted, or after ASU 2016-14 implementation, “without donor restriction”. Instead the entire balance of the endowment fund, including the underwater portion, is included within “net assets with donor restrictions”.  An entity will be required to disclose its interpretation of the entity’s ability to spend from underwater endowment funds along with its policy and any actions taken during the period concerning appropriation from underwater endowment funds.  For each period a Statement of Financial Position is presented, an entity must disclose each of the following, in the aggregate, for all underwater endowments funds:

  1. The fair value of the underwater endowment funds
  2. The original endowment gift amount or level required to be maintained by donor stipulations or by law that extends donor restrictions
  3. Amount of the deficiencies of the underwater endowment funds (1. Less 2.)

See the following example:

Virginia Nonprofit Accounting Firm

Entity management and the governing body should take time now, before the new standard applies, to review their processes and documentation surrounding board designations, updating them as necessary.  Part of the preparation process should be ensuring net asset designations correspond to identifiable assets held by the entity.  Also, documentation should be developed for the entity’s interpretation of the ability to spend from underwater endowment funds.  The policy should be broad enough to apply to the entire endowed net asset base, while calling out any exceptions that are known amongst the group.  The policy should then be reviewed to ensure that a level of prudence has been applied in such a way that long-term implementation will allow for the underwater balances to recover over time.


The next article in this Keiter series on ASU 2016-14 will cover liquidity and availability disclosures…stay tuned!

Questions on this topic? Contact our your Keiter representative or our Not-for-Profit Team | Email | 804.747.0000

Changes to Not-For-Profit Financial Statements series:

Financial Statements of Not-For-Profits: Changes to Net Asset Classifications (Part I)

Not-For-Profit Financial Statements: New Liquidity and Availability Disclosures Required (Part III)

Functional Expense Allocation Methods Not-For-Profits Should Know (Part IV)

Not-For-Profit Functional Expense Reporting: Management and General (Part V)

Statement of Cash Flows and Investment Return Changes: Impact on Nonprofits (Part VI)

Additional Not-for-Profit Accounting Resources:

Nonprofits Request Delay in New UBIT Rules Implementation

Charitable Giving Under the Tax Cuts and Jobs Act of 2017

Excise Tax Changes Impact Tax Exempt Organizations


The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.


About the Authors

Colin is a Business Assurance & Advisory Services Manager at Keiter. He has significant experience in public accounting for both the not-for-profit and private sectors. Colin’s clients rely on him for sound advice and insights on accounting regulations and changes that may impact their business. Read more of Colin's insights on our blog.

More Insights from Colin Hannifin, CPA

Richard is a Partner at Keiter and has over 15 years of accounting and auditing experience in both corporate and public accounting. He provides audit and assurance services to tax-exempt organizations such as foundations, religious entities, private schools, associations, and voluntary health and welfare organizations. He supervises some of Keiter’s larger engagements that are subject to the Uniform Guidance. Richard is a member of the Firm’s Not-for-Profit team. Read more of Richard’s insights on our blog.

More Insights from Richard W. Lewis, CPA, CFE

Eric advises clients on improving the efficiency and developing stronger controls of their internal processes.  He has over nine years of accounting and auditing experience. Eric partners with his clients to help their businesses reach their financial goals. He dedicates his time to serving clients in emerging technology, growth companies, start-ups, and not-for-profit organizations. You can read more of Eric’s auditing insights on our blog.

More Insights from Eric D. Turner, CPA

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