Not-for-profit accounting standards underwent their most significant overhaul in over two decades when the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-14. This standard, formally titled _Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities_, changed the way churches, charities, foundations, and other nonprofit organizations prepare and present their financial statements. Understanding these changes is essential for board members, finance teams, auditors, and donors who rely on transparent nonprofit financial reporting.
Before ASU 2016-14 took effect, the rules governing nonprofit financial statements had remained largely unchanged since 1993 under FASB Statement No. 117. Over that period, the nonprofit sector grew enormously in both size and complexity. Stakeholders, including donors, grantors, creditors, and regulators, increasingly needed clearer, more consistent financial information. FASB responded by launching a multi-phase project to modernize not-for-profit accounting standards, with ASU 2016-14 representing the first and most impactful phase. Pease Bell CPAs supports tax-exempt organizations through these reporting changes as part of our nonprofit services.
How ASU 2016-14 simplified net asset classifications
The most visible change under ASU 2016-14 is the reduction of net asset categories from three to two. Under the previous rules, nonprofits classified their net assets as unrestricted, temporarily restricted, or permanently restricted. ASC 958 now requires only two categories: net assets with donor restrictions and net assets without donor restrictions.
This simplified approach reflects changes in state law that now allow organizations to spend from a permanently restricted endowment even when its fair value has fallen below the original gift amount. These so-called “underwater” endowments, where investment losses have reduced the fund below the donor’s original contribution, are now classified as net assets with donor restrictions. The standard also introduced expanded disclosure requirements for underwater endowments, including the original gift amount, the current fair value, and the organization’s spending policy.
In addition, ASU 2016-14 eliminated the “over-time” method for handling the expiration of restrictions on gifts used to acquire or construct long-lived assets such as buildings or equipment. Under the old approach, organizations could release restrictions gradually over the useful life of the asset. The new standard requires the restriction to be released when the asset is placed in service, unless the donor specifically states otherwise.
New liquidity and availability disclosure requirements
One of the most impactful additions under ASU 2016-14 is the requirement for nonprofits to disclose information about their liquidity and availability of resources. This requirement directly addresses a longstanding concern among donors and creditors: even when a nonprofit reports a healthy total net asset balance, much of that balance may be tied up in illiquid assets or restricted funds.
Under the updated not-for-profit accounting standards, organizations must provide both qualitative and quantitative information about how they expect to meet cash needs for general expenditures within one year of the balance sheet date. This means nonprofits need to explain their approach to managing liquidity, describe any limits on the use of resources, and quantify the financial assets available for general operations.
For many organizations, this disclosure was entirely new. It requires finance teams to think critically about cash flow planning and to communicate that plan clearly in the notes to the financial statements. The goal is to give financial statement users a realistic picture of whether the organization can sustain its operations in the near term, beyond what the statement of financial position alone can convey.
Changes to expense reporting under GAAP for nonprofits
ASU 2016-14 also changed how nonprofits report their expenses. Previously, GAAP for nonprofits required organizations to present expenses by function, broken down by program services, management and general, and fundraising. The new standard retains this requirement but adds a second dimension: expenses must now also be reported by their nature (such as salaries, rent, depreciation, or professional fees) in a single location.
This dual presentation can take the form of a matrix on the statement of activities, a separate statement of functional expenses, or a note disclosure. Regardless of format, the objective is the same: to give donors and other stakeholders a clearer understanding of how the organization spends its resources across both programmatic and operational categories.
The standard also calls for enhanced disclosures about the methods used to allocate costs among program and support functions. Many nonprofits allocate shared costs, such as the salary of an executive director who splits time between program oversight and administration, across multiple functional categories. Under ASU 2016-14, organizations must describe their allocation methodology so that readers can assess whether the reported split between program and support costs is reasonable.
How the standard affects investment return reporting
Under the previous rules, nonprofits had flexibility in how they reported investment expenses. Some organizations netted management fees against investment returns, while others reported them as separate line items. This inconsistency made it difficult to compare investment performance across different nonprofits.
ASC 958 now requires all organizations to net external and direct internal investment expenses against investment return on the statement of activities. External expenses include fees paid to outside investment managers, custodians, and advisors. Direct internal expenses include the compensation of staff members whose primary role is managing the organization’s investment portfolio.
By standardizing this treatment, the updated not-for-profit accounting standards make it easier for board members and donors to evaluate actual investment performance on an apples-to-apples basis, regardless of whether a nonprofit manages its portfolio in-house or through external advisors.
Statement of cash flows: direct method now simplified
ASU 2016-14 also addressed the statement of cash flows, a financial statement that many nonprofit leaders find difficult to interpret. Under the old rules, organizations that chose the direct method, which lists actual cash receipts and payments, were also required to provide a reconciliation to the indirect method. This dual requirement discouraged many nonprofits from using the direct method, even though it tends to be more intuitive for non-accountant board members and donors.
The new standard removes the reconciliation requirement for organizations that choose the direct method. Nonprofits can still use either the direct or indirect method to present net cash from operations, but the elimination of the redundant reconciliation is designed to encourage more organizations to adopt the direct approach. Both methods produce identical bottom-line results; the difference is purely in presentation and readability.
Why ASU 2016-14 is only the beginning
ASU 2016-14 represents phase one of FASB’s broader project to improve nonprofit financial reporting. It was the first major revision to not-for-profit accounting standards since 1993, and it addressed the areas where stakeholders had identified the greatest need for improvement: net asset classification, liquidity disclosure, expense reporting, and investment return comparability.
However, FASB has signaled that additional phases will tackle other areas of nonprofit financial reporting that remain underdeveloped or inconsistent. Topics under consideration include the reporting of operating measures, improvements to the statement of cash flows beyond what ASU 2016-14 addressed, and further refinements to disclosure requirements.
For nonprofit finance professionals, staying current with these standards is not optional. Board members, auditors, and finance teams should review their organization’s financial statements against the requirements of ASC 958, confirm that their liquidity disclosures are complete, and ensure that their expense allocation methodologies are clearly documented and disclosed. Organizations that prepare for an external audit will find that strong audit and assurance services make compliance with these presentation rules far smoother. Guidance from the AICPA and the IRS Form 990 filing requirements can further help finance teams align their reporting and filings.
Frequently asked questions
What is ASU 2016-14?
ASU 2016-14 is an accounting standards update issued by FASB that changed how not-for-profit entities present their financial statements. It simplified net asset classifications from three categories to two, added liquidity disclosure requirements, and updated rules for expense reporting and investment return presentation.
What are the two net asset categories under ASC 958?
ASC 958 requires nonprofits to classify net assets into two categories: net assets with donor restrictions and net assets without donor restrictions. This replaced the previous three-category system of unrestricted, temporarily restricted, and permanently restricted net assets.
What is a nonprofit liquidity disclosure?
A nonprofit liquidity disclosure is a required note in the financial statements that explains how the organization plans to meet its cash needs for general expenditures within one year. It includes both qualitative information about liquidity management practices and quantitative data on available financial assets.
How do nonprofits report expenses under current GAAP?
Under current GAAP for nonprofits, organizations must report expenses by both function (program, management and general, fundraising) and nature (salaries, rent, depreciation) in a single location. They must also disclose the methods used to allocate costs between program and support functions.
What changed about investment return reporting for nonprofits?
ASU 2016-14 requires nonprofits to net all external and direct internal investment expenses against investment return on the statement of activities. This standardized approach replaced the previous practice where organizations had discretion in how they presented investment-related costs.
Does ASU 2016-14 require the direct method for cash flows?
No, ASU 2016-14 does not mandate the direct method. Nonprofits can still choose either the direct or indirect method for presenting the statement of cash flows. However, the standard removed the requirement to reconcile the direct method with the indirect method, making the direct approach less burdensome to implement.
