Preparing for new not-for-profit financial reporting

Written on Sep 20, 2017

By Laura Hay, CPA, CAE

As firms and not-for-profit (NFP) entities begin preparation to implement new financial reporting requirements, Ohio CPAs weigh in on some of the most significant upcoming changes.

The FASB Accounting Standards Update to Topic 958, Presentation of Financial Statements of Not-for-Profit Entities, is effective for annual financial statements issued for fiscal years beginning after Dec. 15, 2017, and for interim periods within fiscal years beginning after Dec. 15, 2018.

In response to stakeholder feedback, including comment from the OSCPA accounting and auditing committee, FASB stopped short of implementing an entirely new financial reporting model for NFPs and is implementing a two-phased approach. Phase one focuses on improving the usefulness of how NFPs communicate information about financial performance and liquidity, while reducing cost and complexity.

Phase two will look at how measures of operations (or financial performance) in the statement of activities align with measures of operations in the statement of cash flows. This proposal has been deferred to be coordinated with related research on financial performance reporting by for-profit entities.

Main provisions

Main provisions of the update include:

Net asset classification

Net asset classes are reduced from three to two: “net assets with donor restrictions” and “net assets without donor restrictions.” This change seeks to reduce complexities and confusion in determining whether donor-imposed restrictions are temporary or permanent.

Additional information will be required regarding the components of net asset classes, including internal board designations, and the nature, amounts and effects of donor-imposed restrictions, including limitations on their use or timeframe.

“NFPs that keep more detailed records of net asset classifications will be better prepared for this change,” said Angela Lewis, CPA, managing director, Crowe Horwath LLP. “With any new standard, organizations want to get it right at the time of implementation and should take time to ensure that the source for classifications is clear."

“While we keep detailed records of the sources of donor restrictions, we are revisiting classifications in preparation for the new standard,” said Barry Reis, CPA, CFO, Jewish Community Federation of Cleveland. “There are some subtleties, such as with donor-advised funds, that require a closer look than just adding together the two previous classifications.”

Functional expense reporting

All not-for-profits will now be required to provide an analysis of expenses by both function and natural classification, as well as disclosing the methods used to allocate expenses to functional categories.

“Not every NFP currently prepares this analysis for their 990,” said William Bauder, CPA, manager, Holbrook and Manter. “In addition to taking a fresh look at their system for allocating expenses, entities need to make sure their process can be audited. While time tracking might not be required for every organization, ‘20% feels right’ will no longer be sufficient.”

Liquidity disclosures

The standard requires quantitative and qualitative information about how an entity manages its liquid available resources and liquidity risks. Quantitative information is provided by segregating current and non-current assets and liabilities on the statement of financial position. Qualitative information will be provided in the footnotes regarding limitations on the use of liquid assets.

"This is an area I expect to be most challenging to implement," Lewis said. “NFPs are assessing the measures that are most relevant to their organizations and taking care in how they should be described for the use of internal and external stakeholders.”

Other key changes

Other key changes applauded by the CPAs included:

•Permitting organizations to choose between reporting cash flows using the direct method or indirect method, based upon which better serves information needs of users. Entities electing the direct method will no longer be required to include an indirect method reconciliation.

•Requiring investment income to be reported net of internal and external investment expenses, and eliminating the requirement to disclose the amount of netted investment expenses. This change removes the difficulty of accurately identifying embedded costs and will improve consistency across organizations.

• Underwater donor-restricted endowment amounts will be reported in net assets with donor restrictions with expanded disclosures about the underwater portion, which was thought to be more intuitive for the user.


Prepare early

“Make sure management and the board are prepared in advance,” Lewis said. “You don’t want the first communication to be at the time the standard becomes effective.”

“Many NFPs rely heavily on the external auditor for assistance with financial statement preparation,” Bauder said. “The client may need educated first on why the financial statements will look different, and what is the purpose of these disclosures, so that management decisions can be made that will affect future reporting.”

Organize records

All of the CPAs strongly recommended that NFPs begin preparing now:

• Does the entity have good historical records of the sources of net asset classifications?

• Does the entity want to report functional expenses consistent with 990 reporting, is the organization comfortable with its processes for capturing expenses by function, and are allocation methods auditable?

Evaluate liquidity disclosures CPAs agreed that this would be the most difficult new requirement to implement, and recommended early evaluation of how the entity should structure its liquidity disclosures and what type of information will be needed.


“This standard will be an improvement for most NFP organizations, which have a leadership engaged in making strategic decisions regarding programs,” Reis said.

“The new rules make more transparent to leaders and key donors funds available for unrestricted purposes and the nature of expenditures.”

Few expressed concerns about the cost of implementing the new rules. Members supported the phased approach, expressing concerns that phase two not create a reporting model for NFPs that differed conceptually from the for-profit model, leading to market confusion, cost and complexity.

Laura Hay, CPA, CAE, is executive vice president of The Ohio Society of CPAs and staff liaison to the Accounting & Auditing Committee. She can be reached at or 614.321.2241.

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