ASU 2016-14 Brings Significant Changes to Not-for-Profits– August 29, 2016

Posted by Steve Cotter

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2016-14 (ASU 2016-14) on August 18, 2016. This much anticipated guidance is hailed as one of the most significant changes affecting not-for-profits in more than 20 years and will be effective for fiscal years beginning after December 15, 2017, and for interim periods beginning after December 15, 2018. The guidance affects multiple areas, but the most significant are: 

  • Net asset classification,
  • Presentation of the statement of cash flows,
  • Expenses,
  • Reporting investment return, and
  • Disclosures surrounding liquidity.

Below is a brief explanation of the impact to these areas.

1. Net Asset Classification. Currently, generally accepted accounting principles (GAAP) shows the classification of net assets as unrestricted, temporarily restricted and permanently restricted.  The new standard would require the net assets to be classified into two buckets, showing the classifications as “without donor restrictions” and “with donor restrictions.” The required disclosures have not changed in regards to the nature and amount of donor restrictions. However, ASU 2016-14 will now require new disclosures for the “without donor restrictions” bucket, which will involve expanded disclosures for the amount, purpose and type of any board designations. In addition, ASU 2016-14 requires enhanced disclosures surrounding changes and the net asset classification of underwater endowment funds.

2. Presentation of the Cash Flows. ASU 2016-14 continues to allow organizations to use either the direct method or the indirect method to prepare its statement of cash flows. Current GAAP requires entities to present the indirect method reconciliation if the direct method is used. ASU 2016-14 removes this requirement. 

3. Expenses. Organizations will need to report their expenses by natural classification as well as functional allocation, either in the financial statements or in the footnotes. Additionally, the method used to allocate costs between program and support services is required to be disclosed.

4. Reporting Investment Return. Organizations will now report investment return net of external and internal investment expenses. Current GAAP requires entities to net investment expenses for financial statement presentation purposes. The change will allow a better comparison of investment returns among all nonprofit organizations — regardless if their investments are managed internally, externally or if the organization uses mutual funds or other investment vehicles in which fees are embedded.

5. Disclosures Surrounding Liquidity. Perhaps the most significant change with ASU 2016-14 is the requirement for an organization to disclose information surrounding its liquidity. The new disclosures will provide more transparent information that will enable financial statement users to have a better understanding of how an organization manages its risks in this regard. The new disclosures will require an organization to include qualitative and quantitative liquidity information. Such information includes how a not-for-profit manages (qualitative) its liquid available resources to meet cash needs for general expenditures within one year of the balance sheet date, as well as the availability (quantitative) of financial assets at the balance sheet date to meet those same expenditures.

ASU 2016-14 brings many beneficial changes to substantially all not-for-profits, as well as donors, grantors, creditors and others that use the financial statements. To prepare, not-for-profits should read ASU 2016-14 and talk to advisors about which specific issues will affect your organization’s financial statements the most. Early application of the standard is permitted, and if you believe your organization would benefit from early adoption, reach out to your accounting and auditing team.

Read more about this update on the FASB website.

Contact Steve Cotter at or Marie Brilmyer at for further discussion.

Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.