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

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

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

Presentation of Financial Statements of Not-for-Profit Entities

Welcome back to Keiter’s series on Accounting Standard Update (ASU) 2016-14, Not-for-Profit Entities (Topic 958), Presentation of Financial Statements of Not-for-Profit Entities.  This article focuses on the changes to the statement of cash flows and the changes related to investment return.

FASB ASU 2016-14: Statement of Cash Flows

Depending on the entity’s decision, implementing ASU 2016-14 may have no impact whatsoever on the presentation of the statement of cash flows.  This standard allows entities to continue using either the direct or indirect method for reporting operating cash flows; however, it no longer requires the indirect reconciliation if using the direct method for reporting.  Most experts agree that the direct method of reporting gives more useful information; however, a majority of all entities, for profits included, continue to use the indirect method of reporting due to familiarity.  Implementing this standard provides a good opportunity to switch to the direct method of reporting since the indirect reconciliation requirement was a source of frustration and seen as an inefficiency resulting in additional time and expense to complete the statement of cash flows.  With this requirement removed, entities may want to consider moving to the more informative direct method approach.

Potential Reclassification of Cash Flow Activities

More changes in this area are anticipated, but are not part of ASU 2016-14.  Those changes include potential reclassifications between types of activities (operating, investing, and financing) and to align the statement of cash flows with the statement of activities.

Changes to Presentation of Investment Return

Regarding investment return, the standard allows for the net presentation of investment expense against investment income; however, gross presentation is still allowable.  This applies to both external and direct internal expenses.  This could impact the investment and endowment footnotes as well as presentation of functional expenses: entities will no longer need to present investment expenses at gross cost as management and general expenses.

Not all entities will have direct internal investment expenses – that is, activities involving direct conduct or direct supervision of the strategic and tactical activities involved in generating investment return.

Examples of direct internal investment expenses:

  • Salaries, benefits, travel, and other costs associated with staff responsible for development and execution of investment strategy; and
  • Allocable costs associated with internal investment management and supervising, selecting, and monitoring of external investment management firms.

These direct internal investment expenses DO NOT include items that are not associated with generating investment return, such as costs associated with unitization and other such aspects of endowment management.

Thanks for following Keiter’s series on ASU 2016-14, Not-for-Profit Entities (Topic 958), Presentation of Financial Statements of Not-for-Profit Entities.

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

Additional Not-for-Profit Accounting Resources:

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

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)

Not-for-Profit Blog

Co-authored by:

Virginia Nonprofit CPA Firm Colin Hannifin, CPA, Manager, Business Assurance & Advisory Services
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.


Virginia Nonprofit CPA FirmRichard 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 non-profit organizations such as foundations, religious entities, private schools, membership, and voluntary health and welfare organizations. He supervises some of our larger non-profit engagements that include the Uniform Guidance. Richard is a member of the Firm’s Not-for-Profit team. Read more of Richard’s insights on our blog.

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 Author

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.

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