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Posted by Michelle Spriggs on Tue, Dec 19, 2017 @ 04:57 PM


Not-for-profit organizations have a year to work on their new financial statement presentation requirements. Changes released in August 2016 affect the financial statement presentation of net asset classification, governing board designation, investment return, underwater endowment funds, capital gifts, expenses, liquidity and operating cash flows. Organizations will need to have the changes ready to go for their 2018 calendar year-end filings (Dec. 31, 2018 or 2019 fiscal year end filings, e.g. June 30, 2019).

Tackling the implementation process can be daunting. Fortunately, the changes are no longer unchartered territory. Some not-for-profit organizations have chosen to early adopt the standard, and the lessons they have learned from implementation may be able to help other organizations get ready for their new requirements.

1. Underwater Endowments Are Prepared for the New Standard

Underwater endowments will be reflected in net assets with donor restrictions rather than net assets without donor restrictions. They will also require enhanced disclosures, including the aggregate amount by which the funds are underwater and the board policy for spending from underwater funds.

Organizations will want to ensure their method for tracking underwater endowments has fund-level information on fair value and the original gift amount. They also want to make sure they have tracking on donor stipulations for amounts above the fair value of the gift. Report writer commands may need to be updated to include the underwater amount in net assets with donor restrictions. Other than that, not many changes will be needed for current treatment of underwater endowments; existing tracking mechanisms should have all the elements required for aggregate disclosure.

2. Investment Returns Maintain the Status Quo

Not-for-profit organizations will be required to present investment returns net of investment expenses, including external and direct internal expenses, on the face of the statement of activities. They will no longer need to disclose investment expenses or investment return by interest, dividends, realized gains or losses and unrealized gains or losses.

Early implementers found the new standard did not change the chart of accounts or the accounting for investment return items. Only small tweaks were needed to existing financial statements and reporting. Organizations may want to evaluate their current netted costs and determine whether they are still appropriate to net under the new guidance. Depending on how the netted expenses change, organizations might need to make modifications to reports other than financial statements for consistency.

3. Cash Flow Presentation Will Likely Not Change

The new standard allows organizations to choose which presentation of operating cash flows to use, the indirect or the direct method, and removes the requirement for organizations using the direct method to perform a reconciliation to the indirect method.

Not-for-profits considering a change to their current practices should consider recasting their most recent financial statement in the new format and discussing those changes with their audit committees, and determine what types of financial system or process changes would be necessary to support the new presentation.

Most organizations that implemented early found that no change to their current cash flow presentation was needed.

4. Net Asset Classifications Are Among the Easiest Changes to Make

The new standard streamlines net asset classification into two categories, those without donor restrictions and those with donor restrictions. In the disclosures, organizations will designate the amount, purpose, and type of board designations on assets without donor restrictions. They will also disclose the nature and amount of restrictions on the assets with donor restrictions.

Organizations that implemented the new standard found most of the current information will be carried over with a few tweaks. Unrestricted, temporarily restricted and permanently restricted terminology will need to be changed in current disclosure language. Not-for-profits will also need to change their charts of accounts and spreadsheets in order to consolidate temporarily and permanently restricted net assets into assets with donor restrictions.

5. Expense Reporting Will Need a Closer Look

All not-for-profit organizations will report expenses by function and natural classification, previously a requirement only of voluntary health and welfare organizations. Entities can report expense details on the face of the financial statements or in the footnotes. Changes will also require further disclosure about the method used to allocate costs among program and support functions.

Not-for-profit organizations that have implemented the expense reporting changes have started with the Form 990 presentation as a base. They adjusted the Form 990 presentation for any differences in how expenses need to be reported in the financial statement.

Limiting the number of line items to less than 12 entries can help simplify expense reporting presentation. If more line items are needed, not-for-profits should consider listing them in a separate schedule or footnote.

6. Liquidity Changes Will Be the Most Challenging to Implement

Changes in the new standard will require liquidity disclosures that are both qualitative (how an organization manages its liquid available resources) and quantitative (information that communicates the available financial assets to meet cash needs within one year of the balance sheet date).

Organizations will need to think about who is using the liquidity information—regulators, bankers, donors, faculty, staff, unions, etc.—and the message they want to convey when making the liquidity changes. In one organization that has already adopted the standard, the CFO and Moody’s liaison at the organization (AVP for Finance) was involved in the discussion of what to include in the disclosure, along with the organization’s audit team. Audit committees should also be consulted.

7. Allocate Resources

Changes in the standard will require varying degrees of internal resources. Management, auditors and audit committees should identify and rank the areas that will be most affected by the new standard. Early implementers found that liquidity disclosures and expense reporting required the most attention, while the net asset class changes and reporting of investment returns required minimal input. No resources were needed for cash flow statement options or the additional disclosures for underwater endowments.

Once the changes are mapped out, organizations should create an implementation plan and communicate the time and cost implications to personnel that will be involved in making the updates. It is recommended that not-for-profits start with the updates that will require the most attention.

For more information about the changes, including any comments, questions or concerns, please contact us.


Michelle Sylvia SpriggsMichelle Spriggs is a Shareholder in the Not-For-Profit & Education Practice. She can be reached at 774.206.8336 or




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Tags: not-for-profit, Michelle Spriggs, NFP, nonprofit, Not-for-profit financial statement, financial statement reporting, financial statement presentation requirements, Financial Statement Standard

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