Preparers and users of not-for-profit financial statements should be aware that there is a standard underway that will have a significant impact on the presentation of these statements. Since 2011, the Financial Accounting Standards Board (FASB) has been working on a plan to change the presentation of not-for-profit statements. The objective of this project is to reexamine the existing standards that have been in place since 1993 and better serve users’ needs by improving net asset classification requirements and information provided in financial statements, as well as in notes about liquidity, financial performance, and cash flows.

As a result of the comment letters following the exposure draft, the FASB Board divided the project into two phases.

Some of the more significant topics and tentative decisions made by the FASB Board as part of Phase One in December 2015 include:

Cash Flow Statement

The Board decided not to require not-for-profit entities to use the direct method of presenting operating cash flows, but instead will continue to allow either the direct method or indirect method. Further, the Board decided to no longer require indirect reconciliation if a not-for-profit chooses to use the direct method.

Net Assets

The Board replaced the existing requirements of presenting totals for each of three classes of net assets on the face of a statement of financial position, and for changes in each of those three classes on the face of a statement of activities, with similar requirements to two classes of net assets: assets with donor-imposed restrictions and assets without donor-imposed restrictions. Relevant information about the nature and amounts of donor restrictions needs to be reported in the notes.

Disclosure of amounts and purposes of board-designated net assets will be required either on the face of the financial statements or in the notes.

Classification and Disclosure of Underwater Endowments

The Board is now requiring that the aggregate amount by which endowment funds are underwater be classified within net assets with donor restrictions, rather than the current unrestricted category.

The Board also is requiring endowment funds that are underwater to include the following disclosures:

  • The not-for-profit’s policy to either reduce expenditure or not spend from underwater endowment funds
  • The aggregate fair value
  • The aggregate original endowment gift amount or level required by donor stipulations or by law to be maintained
  • The aggregate amount of the deficiencies

Expiration of Donor Restrictions to Acquire or Construct Long-Lived Assets

In the absence of explicit donor instructions, not-for-profits would be required to reclassify net assets with donor restrictions that are for the acquisition or construction of a long-lived asset as net assets without donor restrictions when the long-lived asset is placed-in-service. This eliminates the current option of recognizing the expiration of the donor restriction over the asset’s useful life.

Netting of External and Direct Internal Investment Expenses against Investment Return

The Board affirmed the proposal to require the netting of external and direct internal investment expenses against investment return.

Expenses by Nature and Analysis of Expenses by Function and Nature

The Board affirmed the proposal to require all not-for-profits to disclose expenses by natural classification.

Enhanced Disclosures about Cost Allocations and Improved Guidance on Management and General Activities

The Board affirmed the proposal to require not-for-profits to provide enhanced disclosures about the method(s) used to allocate costs among program and support functions.

The tentative decisions outlined above may change, pending the outcome of future Board meetings. The anticipated completion date of Phase One is mid-2016.

For additional information on this topic plus access to frequently asked questions on the exposure draft, visit the FASB website at

Maxine G. Romano can be reached at Email or 215.441.4600.


Subscribe to Kreischer Miller's email newsletter


You may also like: