New Guidance on Presenting Not-for-Profit Entities’ Financial Statements

Posted: 02-07-2018

Since 1995, not-for-profit organizations have been following the same guidance for financial statements presentation in accordance with U.S. generally accepted accounting principles (GAAP).  That revision was a significant change from previous GAAP.  Now there is a new standards update applicable for calendar year 2018 and fiscal years ending in 2019.  Presented below is a summary of the key changes.

  • Net Assets Classifications
    • Under current GAAP, net assets are presented using three different classes:  unrestricted, temporarily restricted and permanently restricted.
    • The new guidance requires two classifications:  net assets with donor restrictions and net assets without donor restrictions.
    • The nature of all net assets restrictions and designations, i.e., donor temporary and permanent restrictions and board designations of unrestricted net assets will be required to be disclosed.
      • Required disclosures will include:  nature, purpose and amounts of restrictions and board designations.
        • Spending and investment policies for designated net assets.
      • Disclosures may be on the face of the statements or in the notes.
  • Underwater Endowments
    • This occurs when the fair value of an investment of funds of permanently restricted net assets (or endowments) is less than the original principal amount of the donation.
    • Previously the deficit was reported in unrestricted net assets.  Now it must be reported in net assets with donor restrictions.
    • Required disclosures include the organization’s policy to reduce expenses or not to spend from the underwater funds.
  • Investment Expenses
    • Investment expenses are now required to be netted against returns on investments.
    • Expenses may include internal and external costs, including those of individuals managing investments.
    • Disclosures of investment expenses and return components are no longer required.
  • Expense Classifications
    • The current requirement is to disclose expenses by function; program services, management and general, and fundraising.
    • The new requirement is to disclose expenses by function and natural classifications.
      • Natural classifications include compensation, supplies, occupancy, utilities, etc.
  • Liquidity and Resources
    • New disclosures are required regarding liquidity and resources:
      • Qualitative information in the notes communicating how an organization manages its liquid resources available to meet cash needs for general expenses within one year of the statement of financial position date.
      • Quantitative information communicating availability of an organization’s financial assets to meet cash needs within one year.
    • Liquidity may be presented in the financial statements as follows:
      • Sequencing assets according to their nearness of conversion to cash and liabilities according to the nearness of their maturity and required use of cash.
      • Classifying assets and liabilities as current and noncurrent.
      • Disclosing in the notes relevant information about the liquidity or maturity of assets and liabilities, including any restrictions on use of assets.
  • Cash Flows Statement
    • Guidance allows a choice between presenting the direct or indirect method.
    • The indirect operating reconciliation is no longer required for the direct method.


Please feel free to contact us to obtain further information and clarification and if you need assistance implementing this standards update.