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

By Colin M. Hannifin, CPA, Business Assurance & Advisory Services Senior Manager | Richard W. Lewis, CPA, CFE, Partner

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

The Not-for-Profit Advisory Committee (the NAC) of the FASB set out on a project to study areas for opportunities to improve GAAP for not-for-profits (NFPs). The NAC determined there was a need to update the current NFP reporting model. More specifically, the NAC determined there was a need for an improved net asset classification scheme that would better describe both the external and internal restrictions placed upon an entity’s net assets.  Additionally, the NAC determined that there was a need to improve the information within the financial statements so that users could better understand an entity’s financial performance, cash flows, and liquidity. Ultimately, the end goal of the project by the NAC was to better enable NFPs to tell their financial story.

This project resulted in the August 2016 issuance of ASU 2016-14, Not-for-Profit Entities (Topic 958), Presentation of Financial Statements of Not-for-Profit Entities, which is effective for years beginning after December 15, 2017 (calendar years 2018 and fiscal years 2019), with early adoption permitted. While this standard applies to all not-for-profits, it is not expected to change current accounting but will affect the financial reporting for all entities.

Financial reporting is going to see key changes in the following areas:

  • Net Asset Classes
  • Liquidity & Availability
  • Expense Reporting
  • Investment Return
  • Statement of Cash Flows

Keiter will be taking a deeper dive into each of these key areas, keeping you informed through our series of blog articles issued monthly, focusing on one of the key areas above.

Net Asset Classes: Part I

Welcome 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 I of our discussion on the changes to net asset classifications.

ASU 2016-14 reduces the total net asset classes from three to two. Net assets formerly known as “unrestricted” will now be titled “without donor restrictions” (emphasis added). Meanwhile, “temporarily restricted” and “permanently restricted” have been merged into one net asset class titled “with donor restrictions” (emphasis added).Once the new standard is implemented, NFPs will be required to present at least these two net asset classes on the Statement of Financial Position. However, disaggregation is permitted as an alternative presentation method. For example, net assets with donor restriction could be further disaggregated into categories like time restricted, purpose restricted, perpetual in nature, or even further subcategorized.  Below, the minimum presentation required and the alternative disaggregation format is illustrated:

Net Asset Classification Changes - Nonprofit CPA

The standard adds an emphasis on how and when resources can be used and whether those resources are restricted for a specified purpose, specified time, or in perpetuity. The significance of each of these restrictions for an entity will determine the best means of presentation. At a minimum, a policy note similar to that currently required will need to be retained, disclosing the two net asset classifications and how and when revenue would be reported for each classification. If significant donor restrictions have not been placed on the contributions an entity has received, then disaggregation may be sufficient at the Statement of Financial Position level. However, most entities will need additional disclosures showing granular detail of when and how resources are available to be utilized in the future. See an example of these additional disclosures below:

Net Assets Donor Restrictions - Virginia CPA

As entities prepare to adopt this new standards, accounting personnel should begin reviewing and updating as necessary their processes and documentation and put in place a plan for implementation of the new standard.

The next article in this Keiter series on ASU 2016-14 will be Net Asset Classes: Part II, focusing on board-designations and underwater endowments…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 II)

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

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About the Authors

Colin M. Hannifin

Colin M. Hannifin, CPA, Business Assurance & Advisory Services Senior Manager

Colin is a Business Assurance & Advisory Services Senior 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.

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Richard W. Lewis

Richard W. Lewis, CPA, CFE, Partner

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. Richard leads the Firm’s Not-for-Profit team.

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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.


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