The Financial Accounting Standards Board (FASB) has issued the first major changes to the accounting standards for nonprofits’ financial statement presentation in more than two decades. Accounting Standards Update (ASU) No. 2016-14, Not-for Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities, affects just about every nonprofit, including charities, foundations, private colleges and universities, nongovernmental health care providers, cultural institutions, religious organizations, and trade associations.

The new standard is intended to provide improved net asset classification requirements and information about nonprofits’ resources (and changes in those resources) to donors, grantors, creditors and other users of nonprofits’ financial statements. It changes the classification of net assets and the information presented in the financial statements and footnotes about an organization’s liquidity, financial performance and cash flows. As a result, stakeholders should find it easier to understand how nonprofits manage their funds.

Background on the ASU

Nonprofits’ financial statements currently are prepared according to guidance published in 1993 as Statement of Financial Accounting Standards No. 117, Financial Statements of Not-for-Profit Organizations (incorporated into Topic 958 in the FASB Accounting Standards Codification). The FASB believes that this reporting model remains sound, but stakeholders have expressed concerns regarding several areas, including:

In response, the FASB issued an Exposure Draft, Presentation of Financial Statements of Not-for-Profit Entities, in April 2015. After receiving an unusual amount of feedback, much of it negative, the FASB decided to split its deliberations into two phases.

The issuance of ASU No. 2016-14 represents the conclusion of Phase 1. Phase 2 will focus on certain issues considered more challenging, such as aligning the presentation of measures of operations between the statements of activities and cash flows, as well as those that might depend on a related FASB project addressing financial performance reporting by for-profit entities. The FASB hasn’t yet announced a timeline for the second phase.

New net asset classifications

One of the more notable changes in the new standard is the replacement of the existing three net asset classes (unrestricted, temporarily restricted and permanently restricted) with two new classes (net assets with donor restrictions and net assets without donor restrictions). The FASB expects this to reduce the complexity of financial reporting for nonprofits, while increasing the understandability for stakeholders. 

The new 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, rather than the current presentation as unrestricted net assets. The guidance also requires expanded disclosures regarding underwater endowments.

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. Nonprofits must use the placed-in-service approach (in the absence of explicit donor stipulations to the contrary). In other words, nonprofits must reclassify these gifts as net assets without donor restrictions when the asset is placed in service, rather than over the asset’s useful life. As a result, organizations won’t be able to match the depreciation expense with the release of these restricted net assets unless stipulated by the donor.

Information about liquidity and availability of resources

The new standard includes specific requirements to help financial statement users better assess a nonprofit’s available financial resources. Organizations must provide:

An asset’s availability may be affected by its nature; external limits imposed by donors, grantors, laws and contracts with others; and internal limits imposed by board decisions. Disclosure is also required for board designations or other internal limits on the use of net assets without donor restriction.

Information about expenses 

To provide a clearer picture of a nonprofit’s spending, the new standard requires reporting of expenses by both function (which is already required) and nature in one location. This presentation, showing how the nature of expenses (for example, salaries and wages, employee benefits, supplies, and rent) relates to the functions (program services and supporting activities), can be presented on a separate statement, on the statement of activities or in the footnotes. In addition, the standard calls for enhanced disclosures regarding specific methods used to allocate costs among program and support functions. 

This information will help financial statement users assess the degree to which expenses are fixed or discretionary, how the related resources are allocated, and the costs of the services provided.

Information about investment returns

Nonprofits will now be required to net all external and direct internal investment expenses against the investment return presented on the statement of activities. Financial statement users will be better able to compare investment returns 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).

The new standard also eliminates the current required disclosure of those netted expenses. This should eliminate the difficulty some nonprofits had with identifying management fees embedded in investment returns.

Presentation of operating cash flows

One of the more controversial components of the FASB’s Exposure Draft was its requirement that organizations use the “direct method,” not the “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 provides more understandable information to financial statement users.

The final version of the new standard allows nonprofits to use either method. But, should an organization opt for the direct method, it will no longer need to include an indirect method reconciliation. The FASB hopes this change, which should reduce the costs of the direct method, will encourage more nonprofits to use it.


The new standard takes effect for annual financial statements issued for fiscal years beginning after December 15, 2017, and for interim periods within fiscal years beginning after December 15, 2018. Early application is allowed. 

Nonprofits should resist the temptation to delay preparations even though they may also be dealing with the implementation of the new accounting standards for lease accounting and revenue recognition. If you have questions about how the new standard will affect your nonprofit, please contact us.


The Financial Accounting Standards Board (FASB) has issued its long-awaited update revising the proper treatment of leases under U.S. Generally Accepted Accounting Principles (GAAP). Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), will affect entities that lease real estate, vehicles, equipment, and other assets. The standard requires these entities to recognize most leases on their balance sheets, potentially inflating their reported assets and liabilities. 


According to the FASB, most lease obligations today aren’t recognized on the balance sheet, and transactions often are structured to achieve off-balance-sheet treatment. A 2005 U.S. Securities and Exchange Commission (SEC) report estimated that SEC registrant companies held approximately $1.25 trillion in off-balance-sheet lease obligations. As a result of these obligations being left off balance sheets, users of financial statements can’t easily compare companies that own their productive assets with those that lease their productive assets. 
To address this issue, the FASB launched a joint lease accounting project with the International Accounting Standards Board (IASB) in 2006. The joint project was unsuccessful, however. The boards couldn’t agree on how to report leases on the income statement and decided to issue separate standards. The IASB issued its standard (International Financial Reporting Standards 16) in January, and now the FASB has released its own standard.

Impacts on lessees

Currently, entities that lease assets (lessees) account for a lease based on its classification as either a capital (or finance) lease or an operating lease. Lessees recognize capital leases (for example, a lease of equipment for nearly all of its useful life) as assets and liabilities on their balance sheets. But they don’t recognize operating leases (for example, a lease of office or retail space for 10 years) on the balance sheet. Such leases appear in financial statements only as a rent expense and disclosure item.
The new standard will require lessees to recognize on their balance sheets assets and liabilities for all leases with terms of more than 12 months, regardless of their classification. Lessees will report a right-to-use asset and a corresponding liability for the obligation to pay rent, discounted to its present value. The discount rate is the rate implicit in the lease or the lessee’s incremental borrowing rate.
The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee will continue to depend primarily on its classification as a capital or operating lease:
The standard requires additional disclosures to help users of financial statements better understand the amount, timing and uncertainty of cash flows related to leases. Lessees will disclose qualitative and quantitative requirements, including information about variable lease payments and options to renew and terminate leases.
These changes may have additional repercussions for lessees. Entities with significant leases may incur costs to educate their employees on the proper application of the new requirements and financial statement users on the impact of the requirements. They’ll need to develop supplemental processes and controls to collect the necessary lease information. 
The reporting changes could affect financial ratios and, in turn, have implications for debt covenants. They might also lead to higher borrowing costs for lessees whose balance sheets look weaker with their operating leases included. Entities could consider buying instead of leasing, because they’ll end up with similar leverage on their balance sheets from either transaction.

Impacts on lessors

Entities that own leased assets (lessors) will see little change to their accounting from current GAAP. The new standard does, however, include some “targeted improvements” intended to align lessor accounting with both the lessee accounting model and the updated revenue recognition guidance published in 2014 (ASU No. 2014-09, Revenue from Contracts with Customers)
For example, lessors may be required to recognize some lease payments received as liabilities in cases where the collectability of the lease payments is uncertain. Users of financial statements will have more information about lessors’ leasing activities and exposure to credit and asset risk related to leasing.
Lessors also could see the changes to lease accounting play out in lease negotiations. Existing lessees may seek to modify their leases to reduce the impact of the new standard on their balance sheets by, for example, securing lease terms of one year or less. 

Combined contracts

Contracts sometimes include both lease and service contract components (for example, maintenance services). ASU 2016-02 continues the requirement that entities separate the lease components from the nonlease components, and it provides additional guidance on how to do so. 
The consideration in the contract is allocated to the lease and nonlease components on a relative standalone basis for lessees. For lessors, it’s done according to the allocation guidance in the revenue recognition standard. Consideration attributed to nonlease components isn’t a lease payment and, therefore, is excluded from the measurement of lease assets or liabilities.

Interplay with international standards

Many aspects of ASU 2016-02 are converged with IFRS 16, including the definition of a lease and initial measurement of lease liabilities. But there are some significant differences.
For example, the IASB opted for a single-classification model that requires lessees to account for all leases as capital leases. That means leases classified as operating leases will be accounted for differently under GAAP vs. IFRS, with different effects on the statement of comprehensive income and the statement of cash flows.

Effective dates and transition

Public companies are required to adopt the new standard for interim and annual periods beginning after December 15, 2018. Nonpublic entities following GAAP will need to comply for annual periods beginning after December 15, 2019, and for interim periods beginning a year later. Early adoption is permitted.
The standard requires entities to take a “modified retrospective transition approach,” which includes several optional “practical expedients” entities can apply. An entity that elects to apply the practical expedients will, in effect, continue to account for leases that begin before the effective date in accordance with previous GAAP unless the lease is modified. 
The exception is that lessees are required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under previous GAAP. 

Act soon if you have extensive lease portfolios

Because of this standard’s long gestation period, many entities have taken a wait-and-see approach to tackling the lease accounting changes. But now that the new standard has been released, entities would be wise to begin their preparations if they have extensive lease portfolios. 




SKR+Co Not-for-Profit Newsletter

June 2014


Footnotes tell a story — What constituents can glean from your financial statements


When reviewing financial statements, nonprofit board members and managers sometimes make the mistake of focusing solely on bottom-line figures, but these statements also may include a wealth of information in their disclosures. Savvy constituents and potential supporters know this, so nonprofit executives need to be familiar with the common types of disclosures and the information they make available for scrutiny. This article notes the information that statements provide regarding accounting policies, related party transactions, contingencies and other matters. A sidebar describes a particular Form 990 disclosure that has gotten renewed attention.

Read the Full Article Here.


Tips for preventing fraud in your organization

Fraud doesn’t just hurt a nonprofit’s bottom line — it also could do devastating damage to its reputation. However, this article discusses how, by implementing some simple controls, an organization can help protect itself from these risks. These controls involve segregation of accounting duties, fraud awareness training for all employees, establishment of a fraud hotline, and risk assessment.

Read the Full Article Here.


Not all funds are created equal


Types of funding vary greatly in how they can — or cannot — be used. This article discusses the differences between permanently restricted funds, temporarily restricted funds and unrestricted funds, and how to beef up donations of the latter.

Read the Full Article Here.


Newsbits — A-133 audit threshold change, online fundraising failures, and new open data tool


In this issue, “Newsbits” takes a look at Office of Management and Budget rules that reduce the burden on smaller nonprofits by increasing the threshold that triggers compliance audits. It also discusses a study showing that most organizations have room for improvement with online fundraising, and notes an online tool that provides free and open access to data on nearly 82,000 independent, corporate, community and grantmaking operating foundations.

Read the Full Article Here.




Steve Hochstetter, CPA, ABB, CFF,CVA
Audit Partner



Jamie Meidinger, CPA
Audit Manager



Jeff Talus, CPA
Tax Partner

Doreen Merz, CPA
Tax Manager



For more information on our Not-for-Profit services, please see our website HERE.






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