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Home (https://www.cpajournal.com) / CPA Journal Content (https://www.cpajournal.com/articles/) / ICYMI | Implementing ASU 2016-14 on the Presentation of Not-for-
Pro t Financial Statements

ICYMI | Implementing ASU 2016-14 on the Presentation of Not-for-

Profit Financial Statements
Changes Aim to Provide More Relevant Information and Perspective
 
 

By  Robert A. Dyson, CPA (https://www.cpajournal.com/author/radyson/) and Travis Carey, CPA

(https://www.cpajournal.com/author/tcarey/)

 Feature Articles (https://www.cpajournal.com/category/feature-articles/), April 2017 Issue (https://www.cpajournal.com/category/magazine/april-2017-issue/) | 

April 2018 
 Get Copyright Permission (https://www.copyright.com/openurl.do?&issn=0732-8435&WT.mc.id=New%20York%20State%20Society%20of%20Certi ed%20Public%20Accountants)
FASB’s Accounting Standards Update (ASU) 2016-14, Presentation of Financial Statements of Not-for-Pro t Entities, contains changes in reporting requirements that
will signi cantly affect how nonpro ts communicate with stakeholders. The authors walk through how  the ASU affects the presentation of an organization’s nancial
statements, particularly liquidity and the availability of resources, nancial performance, and cash ow. An example using a hypothetical nonpro t illustrates the
changes to asset classes and the alternatives in the statement of activities.

***

In August 2016, FASB issued Accounting Standards Update (ASU) 2016-14, Presentation of Financial Statements of Not-for-Pro t Entities, with the stated purpose of
improving nancial reporting by not-for-pro t entities (NFP). Among other provisions, ASU 2016-14 reduces the number of classes of net assets from three to two,
requires the presentation of expenses in both natural and functional classi cations, and eliminates the requirement to prepare a reconciliation in the statement of cash
ows when applying the direct method. It also revises the de nitions of certain terms, which are presented in the sidebar, Changes in the Master Glossary. FASB has
relegated some of the changes contemplated in the original exposure draft, including intermediate measures of operations, de ning such measures, and aligning the
operating de nitions in the statements of activities and cash ows, to a second phase of the project, to be addressed in the future.

CHANGES IN THE MASTER GLOSSARY

Board-designated endowment fund:

An endowment fund created by an NFP’s governing board by designating a portion of its net assets without donor restrictions to be invested to provide income
for a long, but not necessarily speci ed, period.

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 xed assets, or other uses.

Donor-imposed restriction:
A donor stipulation that speci es a use for a contributed asset that is more speci c than broad limits resulting from the nature of the NFP, the environment in
which it operates, or the purposes speci ed in its articles of incorporation or bylaws.

Donor-restricted endowment fund:

An endowment fund created by a donor stipulation requiring investment of the gift in perpetuity or for a speci ed term.

Donor-restricted support:
Donor-restricted revenues or gains from contributions that increase net assets with donor restrictions.

Endowment fund:
An established fund of cash, securities, or other assets to provide income for the maintenance of an NFP. The use of the fund’s assets may be with or without
donor-imposed restrictions. Endowment funds established by donor-restricted gifts may provide income either in perpetuity (permanent endowment) or for a
speci ed period (term endowment).

Functional expense cassification:

A method of grouping expenses according to the purpose for which costs are incurred. The primary functional classi cations of an NFP are program services and
supporting activities.

Natural expense classification: 

 A method of grouping expenses according to the kinds of economic bene ts received in incurring those expenses, such as salaries and wages, employee bene ts,
professional services, supplies, interest expense, rent and utilities, and depreciation 

Net assets with donor restrictions:

The portion of net assets subject to donor-imposed restrictions.

Net assets without donor restrictions:

The portion of net assets not subject to donor-imposed restrictions.

Programmatic investing:
The activity of making loans or other investments that are directed at carrying out an NFP’s exempt purpose rather than investing in the general production of
income or appreciation of an asset. An example is a loan made to lower-income individuals to promote home ownership.

Underwater endowment fund:

A 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.

ASU 2016-14 was amended by ASU 2016-18, Restricted Cash, and ASU 2017-02, Clarifying When a Not-for-Pro t Entity That Is a General Partner or a Limited
Partner Should Consolidate a For-Pro t Limited Partnership or Similar Entity. ASU 2016-18 requires that cash restricted by donors and other outsiders be combined
with unrestricted cash in the statement of cash ows.

ASU 2016-14 is effective for scal years beginning after December 15, 2017, with early application permitted. It should be applied on a retrospective basis; an NFP,
however, has the option to omit the analysis of expenses by both “functional” and “natural” classi cation, as well as certain disclosures about liquidity and availability of
resources, for any comparative periods originally presented before the period of adoption.

To date, Form 990 and related state tax forms have not been revised to re ect the ASU. NFPs may wish to defer early adoption of ASU 2016-14 until the forms’
instructions are revised to re ect the update.

This article provides an example of implementing ASU 2016-14 that focused on the following concepts:

 Liquidity and availability of resources

 Financial performance
 Cash ow reporting.

Delta NFP
Delta Education and Cultural Development Agency (Delta) is an NFP that operates educational and cultural programs. Delta elected to adopt ASU 2016-14 for its
scal year ending on June 30, 2018. Exhibits 1 (https://www.nysscpa.org/news/publications/the-cpa-journal/article-detail?ArticleID=12284#T1) and 2
(https://www.nysscpa.org/news/publications/the-cpa-journal/article-detail?ArticleID=12284#T2) present the effects of adopting ASU 2016-14 on the statement of
nancial position and endowment funds, respectively. Exhibits 3 (https://www.nysscpa.org/news/publications/the-cpa-journal/article-detail?ArticleID=12284#T3)
and 4 (https://www.nysscpa.org/news/publications/the-cpa-journal/article-detail?ArticleID=12284#T4) present the effect of adopting ASU 2016-14 on the
statement of activities.

EXHIBIT 1
Conversion of the Statement of Financial Position under Current Guidance ASU 2016-14, as of July 1, 2017


 

EXHIBIT 2
Changes in Endowment Funds under ASU 2016-14, as of June 30, 2017


 

EXHIBIT 3
Presentation of the Statement of Activities for the Year Ended June 30, 2018 ASU 2016-14: Format A


 

EXHIBIT 4
Presentation of the Statement of Activities for the Year Ended June 30, 2018 ASU 2016-14: Format B


 

Liquidity and Availability of Resources

NFP resources may be limited due to donor restrictions, contractual obligations, or board designations. Current accounting guidance focuses on the existence or
absence of donor-imposed restrictions by presenting an NFP’s net assets and revenue in three classes: permanently restricted (the donor stipulates the amounts that
can never be used), temporarily restricted (the donor restriction expires when the stipulated time has elapsed, when the stipulated purpose has been ful lled, or both),
and unrestricted (the amounts can be used for any activity consistent with the NFP’s exempt purpose).

The current guidance also does not identify all amounts that are not available for general operations. Resources limited by grantors, laws, and contracts are not clearly
presented, even though they affect an NFP’s liquidity. In addition, the statement of nancial position does not re ect laws that permit access to certain amounts of
permanently restricted net assets.

Background.
As shown in Exhibit 1 (https://www.nysscpa.org/news/publications/the-cpa-journal/article-detail?ArticleID=12284#T1), Delta’s statement of nancial position as of
July 1, 2017, presents temporary donor restrictions of $10,050,000 and permanent donor restrictions of $9,000,000, broken down as follows.

In 2004, Delta received a gift restricted to the purchase of land and building. Delta elected to classify the gift as temporarily restricted and recognize the release from
restrictions over the building’s useful life, which approximates depreciation. At June 30, 2017, the net carrying value of the facility was $2 million. In addition, the
donor speci ed that Delta use its own funds to maintain a separate bank account with a balance no less than $250,000 until June 30, 2022, to be used solely for major
repairs and replacements of that facility. Although the donor did not provide the funds, its requirement to maintain a major repairs and replacements account is a
donor-imposed stipulation on the use of resources; accordingly, Delta recorded the $250,000 as temporarily restricted net assets and restricted cash.

Temporarily restricted net assets also include $5 million of other donor-restricted contributions. This amount included $1.5 million, which the board designated as an
 not begun as of June 30, 2017) and the purchase of equipment
endowment fund, and a $900,000 gift, which is restricted to the renovation of Delta’s facility (which had
for the educational programs. The amount and use of the board-designated endowment fund is totally at Delta’s discretion.

Permanently restricted net assets include one endowment fund with an original balance of $8 million. It is deemed an “underwater endowment fund” because it
incurred net unrealized losses of $500,000, leaving it with a balance of $7.5 million. Applying the current guidance, Delta re ected the $500,000 in unrestricted net
assets.

In the year ended June 30, 2016, Delta received a gift of $1 million, which required the establishment of a $3 million matching fund. The gift permits Delta to spend all
income generated by the original gift and matching fund, which includes interest and dividends as well as realized and unrealized gains and losses on the underlying
investments. In addition, Delta may reduce the matching fund balance by no more than $200,000 per year, either by re ecting unrealized losses on the investments or
by expenditures. Delta classi ed the $1 million gift in permanently restricted net assets. Applying the same policy as discussed above in the major repairs and
replacements account, Delta accounted for the $3 million matching fund as restricted cash and in temporarily restricted net assets. At June 30, 2017, the balance was
reduced to $2.8 million as a result of a net unrealized loss of $150,000 and the expenditure of $50,000 for operations.

The new guidance.

ASU 2016-14 does more than change the categorization of net assets. The objective of ASU 2016-14 is to clearly present an NFP’s liquidity and ability to operate.
Unrestricted net assets are now called “net assets without donor restrictions.” Permanently restricted and temporarily restricted net assets are combined into “net
assets with donor restrictions.” An NFP may elect to continue to present net assets with perpetual donor restrictions and those expected to be released from
restrictions over time or for a particular purpose. Regardless of the detail in the presentation, the NFP must present total net assets with donor restrictions, total net
assets without donor restrictions, and total net assets in the statement of nancial position.

Other provisions of ASU 2016-14 may affect both the balances of the different classes of net assets and those of endowment funds. For example, contributions
restricted to the acquisition of long-lived assets are currently recorded as increases in temporarily restricted net assets; the release from restrictions can either be
when the asset is acquired and placed in service or over its useful life. ASU 2016-14 removes that option. Although NFPs are still required to classify contributions
restricted to acquire long-lived assets as donor-restricted support, the contributions are released from restrictions and reclassi ed to net assets without donor
restrictions when the asset is acquired and placed into service, unless the donor placed a time restriction on the use of the asset.

As with the current guidance, ASU 2016-14 requires the recognition of net assets released from restrictions in the period the stipulated time has elapsed, when the
stipulated purpose has been ful lled, or both. At that time, the amount is reclassi ed from net assets with donor restrictions to net assets without donor restrictions.

Changes in the accounting for net assets currently classi ed as permanently restricted re ect laws permitting appropriation by the NFP. In New York State, the New
York Prudent Management of Institutional Funds Act (NYPMIFA) permits the governing board, after considering eight speci c factors, to appropriate a “prudent”
expenditure of funds from a donor-restricted endowment fund (currently classi ed as permanently restricted net assets). At that time, the appropriated amount is
reclassi ed from net assets with donor restrictions to net assets without donor restrictions. NYPMIFA is similar to the nationwide model, the Uniform Prudent
Management of Institutional Funds Act; a fuller discussion of both is beyond the scope of this article.

Endowment funds are created either by one or more donors or by an NFP’s governing board. Endowment funds created by a donor who stipulates restrictions on the
use of the assets to speci c activities, to speci c future time periods, or in perpetuity are classi ed in net assets with donor restrictions. Endowment funds created by
an NFP’s governing board are generally reported in net assets without donor restrictions, because the governing board can reverse its decision to create the fund. ASU
2016-14 notes, however, that a board-designated endowment fund may include a portion of net assets with donor restrictions. For example, Delta’s decision to
designate $1,500,000 of donor-restricted contributions as an endowment fund results in a donor-restricted, board-designated endowment fund.

As seen in Exhibit 1 (https://www.nysscpa.org/news/publications/the-cpa-journal/article-detail?ArticleID=12284#T1), Notes 3 and 5, a donor-restricted

endowment fund that is underwater should include the accumulated losses of that fund in net assets with donor restrictions and not in net assets without donor
restrictions. The NFP is required to disclose the fair value of the underwater endowment funds, the original gift required to be maintained by donor stipulation, and
the amount of de ciencies in the underwater endowment funds.

ASU 2016-14 also enhances disclosures regarding liquidity and how restrictions affect the use of resources. It expands disclosure requirements on the nature and
amounts of different types of donor-imposed restrictions as well as the amounts and purposes of board-designated net assets. Furthermore, ASU 2016-18 requires
disclosure of the nature of the restrictions on cash while also combining restricted cash with unrestricted cash on the statement of cash ows.

Other than changes in the net asset section, ASU 2016-14 does not change the format of the statement of nancial position. It does, however, change the format of the
statement of activities, as discussed below.

Financial Performance
ASU 2016-14 aligns current reporting requirements in the statement of activities to the two new classi cations of net assets. The statement of activities reports
revenues as “increases in net assets without donor restrictions,” unless the use of the assets received is limited by donor-imposed restrictions. Donor-restricted
contributions whose restrictions are met in the same reporting period received may, however, be reported as “unrestricted support in net assets without donor
restrictions,” provided that an NFP has a similar policy for reporting investment gains and income, reports consistently from period to period, and discloses its
accounting policy. Expenses are reported as decreases in net assets without donor restrictions. ASU 2016-14 presents three alternate formats for the statement of
activities:

 Format A presents a single column, which facilitates comparative nancial statements


 Format B presents the three columns—without donor restrictions, with donor restrictions, and total
 Format C presents two statements of activities—one showing changes in net assets without donor restrictions, and one showing changes in net assets with
donor restrictions. 

Formats A and B are illustrated in Exhibits 3 (https://www.nysscpa.org/news/publications/the-cpa-journal/article-detail?ArticleID=12284#T3) and 4

(https://www.nysscpa.org/news/publications/the-cpa-journal/article-detail?ArticleID=12284#T4), respectively.

All three formats separate program activities from supporting activities. Program activities consist of services rendered to bene ciaries that ful ll the NFP’s mission.
Those services are the major purpose for Delta and relate to both educational and cultural programs. Supporting activities are all of Delta’s activities other than
program services. Generally, supporting activities include management and general activities, fundraising activities, and membership development activities.

ASU 2016-14 permits the presentation of intermediate measures of operations. Because “intermediate measures of operations” is de ned by the reporting entity, the
ASU requires disclosure of the description of the nature of the term “operations” if it is not apparent from the details provided on the face of the nancial statements.
ASU 2016-14 generally considers revenues as being derived from transactions that are part of the NFP’s central activities, and gains and losses as being derived from
incidental and peripheral transactions or from events and circumstances beyond the control of the NFP. Incidental or peripheral activities include sale of property no
longer needed and certain investment gains and losses. Investment gains and losses appropriated for operations are reclassi ed as operating activities; contributions
to endowment funds are reclassi ed to non-operating activities. Delta’s statement of activities showing the intermediate measure of operations is presented in Exhibit
4 (https://www.nysscpa.org/news/publications/the-cpa-journal/article-detail?ArticleID=12284#T4).

Gains and losses on investments (other than programmatic investing) and other assets (or liabilities) are recognized as increases or decreases in net assets without
donor restrictions unless their use is restricted by explicit donor stipulations or by law. In a change required by ASU 2016-14, external and direct internal investment
expenses are netted against investment returns and reported in the net asset category in which the net investment return is reported. In addition, these expenses are
no longer required to be disclosed.

ASU 2016-14 also enhances disclosures regarding liquidity and how restrictions affect the use of resources.

Direct internal investment expenses involve the direct conduct or direct supervision of the strategic and tactical activities involved in generating an investment return.
These include costs associated with the of cer and staff responsible for the development and execution of investment strategy, such as salaries, bene ts, and travel, as
well as other allocable costs associated with internal investment management and supervising, selecting, and monitoring external investment management rms.

A new requirement of ASU 2016-14 is to provide information ordinarily included in a statement of functional expenses for all NFPs. Currently, only voluntary health
and welfare organizations are required to provide this information. ASU 2016-14 requires a presentation of the relationship between functional and natural
classi cation for all expenses in an analysis that disaggre-gates functional expense classi cations (such as major classes of program services and supporting activities)
by their natural expense classi cations. This information should be presented on the face of the statement of activities, as a schedule in the notes to the nancial
statements, or in a separate nancial statement, such as a statement of functional expenses.

Because certain activities bene t more than one function, costs re ecting direct supervision of program or other supporting activities are allocated from management
and general to program activities. For example, Delta’s CEO is responsible for oversight of both program and administrative activities. Administrative activities include
spending time with current and potential donors during fund-raising and supervising administrative activities. As a result, Delta allocated a portion of the CEO’s
compensation and bene ts and other expenses to program, fund-raising and management, and general functions based on the time spent on those activities. In
addition, information technology directly bene ted management and general, fund-raising, and program delivery. Accordingly, information technology costs were
allocated among those functions.

In contrast, Delta’s human resources department was involved in the bene ts administration for all personnel. The human resources department’s related costs were
not allocated to any speci c program; rather, those costs were charged to management and general expenses because bene ts administration is a supporting activity
for the entire entity.

Statement of Cash Flows

ASU 2016-14 permits NFPs to present operating cash ows using either the direct method or the indirect method, but no longer requires the reconciliation of the
change in net assets to net cash provided by (used in) operating activities if an NFP elects to apply the direct method. FASB concluded that removing the requirement
to prepare the reconciliation when the direct method is applied might encourage more NFPs to choose the direct method.

Prepare for Changing Presentation

ASU 2016-14 contains additional changes that affect the presentation of nancial statements. Financial statement preparers should review the update to determine
its effect on their own particular circumstances and whether they need to expand their current nancial statement disclosures.

Travis Carey, CPA is managing director of Carey LLC, New York, N.Y.
Robert A. Dyson, CPA is the director of quality control at MBAF CPAs LLC, New York, N.Y, as well as a member of The CPA Journal Editorial Board.
USING THE NEW REPORTING REQUIREMENTS FOR NOT-FOR-PROFIT ENTITIES (HTTPS://WWW.CPAJOURNAL.COM/2018/04/25/USING-THE-NEW-REPORTING-REQUIREMENTS-
 FOR-NOT-FOR-PROFIT-ENTITIES/)
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