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To our not-for-profit clients:

With the New Year, a new accounting standard will go into effect regarding churches, charities, and not-for-profit entities. This standard, ASU 2016-14, is the first phase of a larger project that is aiming to enhance financial reporting transparency for all users of your financial statements. It is required to be implemented for any fiscal year beginning after Dec. 15, 2017. It also will be required to implement the changes retrospectively. What this means for you is that prior period adjustments may need to be made to bring your financials up to date with these requirements.

Below is a brief summary of each of the major changes and what each of them may mean for your organization.

Net asset classifications

The existing rules require nonprofit organizations to classify their net assets as either unrestricted, temporarily restricted or permanently restricted. The new standard is that there will be only two classes: net assets with donor restrictions and net assets without donor restrictions.

Footnote disclosures will be required to include the timing and nature of the restrictions, as well as the composition of net assets with donor restrictions at the end of the period. Disclosures will continue to show an analysis by time, purpose and perpetual restriction. In most cases, temporarily and permanently restricted net asset balances will be combined to create the balance in Net Assets with Donor Restrictions. Board-Designated net assets will have enhanced disclosure requirements surrounding the amounts and purposes of these designations.

The simplified approach recognizes changes in the law that now allow organizations to spend from a permanently restricted endowment even if its fair value has fallen below the original endowed gift amount. Such “underwater” endowments will now be classified as net assets with donor restrictions, along with being subject to expanded disclosure requirements. In addition, the new standard eliminates the current “over-time” method for handling the expiration of restrictions on gifts used to purchase or build long-lived assets (such as buildings).


The new standard requires entities to report expenses by both function and nature (which is already required) in one location. Each organization will now be required to include a Statement of Functional Expenses as part of their financial statements. Many organizations have already elected to include this statement.

In addition, it calls for enhanced disclosures regarding specific methods used to allocate costs among program and support functions. It is key that any methodology that is used to allocate expenses between program and supporting functions be thoroughly documented. The standard also identifies allowable methodologies as some current allocation methods will no longer be acceptable.

Investment returns 

Organizations will be required to net all external and direct internal investment expenses against the investment return presented on the statement of activities. This will facilitate comparisons among different nonprofits, regardless of whether investments are managed externally (for example, by an outside investment manager who charges management fees) or internally (by staff). A disclosure of the components of investment expense will no longer be required.

Liquidity and availability of resources 

This includes qualitative and quantitative information about how they expect to meet cash needs for general expenses within one year of the balance sheet date. This also includes providing information for financial statement users to gain understanding of an entity’s exposure to risks, as well as how an entity manages its liquidity risk.

Cash flow presentation methods

Additionally, the new standard allows nonprofits to use either the direct or indirect method to present net cash from operations on the statement of cash flows. The two methods produce the same results, but the direct method tends to be more understandable to financial statement users. To encourage not-for-profits to use the direct method, entities that opt for the direct method will no longer need to reconcile their presentation with the indirect method.

We recognize this broad overview of how ASU 2016-14 is effecting the way that all not-for-profit entities prepare and present financial statements may seem challenging. All of us at MBE are here to help you navigate through the changes this new standard brings. We are here as an available resource to make your implementation process as smooth as possible. Please don’t hesitate to reach out to us with your questions.