Q&A: Navigating New Not-for-Profit Reporting Standards

by Tammy Erickson, Partner, and Danielle O'Connor, Senior Manager, Not-for-Profit Practice

For the first time in more than 20 years, there will be changes to the way not-for-profit organizations are required to present their financial statements. On November 1, 2016, Tammy Erickson, a partner, and Danielle O’Connor, a senior manager, in our Not-for-Profit Practice, hosted a webcast to discuss the Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2016-14, Presentation of Financial Statements of Not-for-Profit Entities.

The original Not-for-Profit Accounting & Auditing—Fall 2016 Update presentation is available on-demand if you’d like to revisit it. We’ve also compiled a list of questions organized by category that didn’t make it into the live webcast. You’ll find responses from our webcast hosts below.

Net Assets

Is a grant that has time and purpose restrictions solely considered a purpose restriction? Relatedly, is a time restriction only classified as such when it’s the only restriction?

If a grant has purpose and time restrictions, funds shouldn’t be released until both stipulations are met. For disclosure, explicit donor stipulations generally carry more weight than implied restrictions.

ASU 2016-14 gives an example of a donor who provides a gift that’s payable in two installments—one each in years two and three—with an explicit donor stipulation that the amount be used to purchase equipment. Under ASU 2016-14, this gift would be considered both purpose and time restricted.

However, if the equipment is acquired in year two and exceeds the promised amount, then, assuming there’s no specific stipulation made by the donor, the standard states it would be reasonable to conclude the purchase of equipment fulfilled the restriction, and the full amount would be released from donor restrictions.

In many situations, donated amounts that have both purpose and time restrictions would be categorized under the purpose restriction for disclosure purposes. However, the organization would need to consider the time restriction. If the time restriction is longer than the purpose restriction based on an explicit donor stipulation, the funds may need to be categorized as time restricted or disclosed separately with an explanation that there are purpose and time restrictions.

Can underwater endowment funds be presented in total, or does each underwater endowment fund need to be listed individually?

The standard states that fund information is required to be presented in the aggregate, so all underwater endowment funds can be presented in total.

Do organizations with underwater endowments need to reclassify related unrestricted net assets as net assets with donor restrictions?

Under ASU 2016-14, all underwater endowments will need to be classified in net assets with donor restrictions. Any underwater endowment amounts classified as unrestricted net assets at the time you implement ASU 2016-14 will need to be reclassified as net assets with donor restrictions.

Can you provide sample policies for board-designated net assets and underwater endowment spending?

The ASU includes implementation guidance with a section on sample footnotes, which can be found beginning on page 60.

Liquidity and Availability

When do the changes for ASU 2016-14 go into effect? And are all changes required to be made in the first year the ASU is adopted as well as in the preceding year?

ASU 2016-14 is effective for fiscal years beginning after December 15, 2017, and for interim periods within fiscal years beginning after December 15, 2018. Early adoption of the standard is permitted.

The amendments should be applied retrospectively to all periods presented. If the organization presents comparative financial statements, the not-for-profit has the option to omit some information for any periods presented before the year it adopts the standard. The information it can omit includes:

  • Analysis of expenses by both functional and natural classifications
  • Disclosure of liquidity and availability of resources

In the year of adoption, not-for-profits should disclose the nature of any reclassifications or restatements as well as any effects on the changes in their net asset classes for each year presented.


How would you report independent school admissions expenses for functional expense allocation?

Most institutions use the following classifications when presenting expenses by functional expense classification in financial statements:

  • Educational and general
  • Scholarships and fellowships
  • Institutional support
  • Student services
  • Academic support
  • Instruction
  • Auxiliary enterprises

The functional classifications are to help donors, creditors, and others in assessing an organization’s service efforts, including the costs of services and how it uses resources. Program services are defined as “the activities that result in goods and services being distributed to beneficiaries, customers, or members that fulfill the purposes or mission for which the organization exists. Those services are the major purpose for and the major output of the organization and often relate to several major programs.” The number of functional reporting classifications for program services varies according to the nature of the organization and the services it renders.

Is a total amount required for supporting activities?

Typically, there’s a total amount for management and general expenses and a total amount for fundraising expenses. There doesn’t necessarily have to be a total for all supporting expenses, but there should be a total amount given for each major category of supporting activity expenses.

Are not-for-profits required to allocate supporting activities to program activities?

No, they’re required to provide program activity expenses separately from supporting activity expenses. Program services and supporting services are each defined in the new standard.

How detailed do program activity expenses need to be?

Program activity expenses should provide total expenses for each major program. This can be done by natural classification. The number of functional reporting classifications for program services varies according to the nature of the organization and the services it renders. Most organizations incur costs and provide services for several separate and identifiable programs, and the expenses for those programs should be disaggregated and reported. The goal is to report meaningful information about the cost of the organization’s service efforts.

Are there any rules for the nature of classifications?

Functional expenses should be disaggregated by their natural expense classification. Natural expense classification is a means for grouping expenses according to the types of economic benefits received by incurring those expenses. Examples include:

  • Salaries and wages
  • Employee benefits
  • Professional services
  • Supplies
  • Interest expense
  • Rent
  • Utilities
  • Depreciation

Do you have an example of the method used for cost allocation?

The Financial Accounting Standards Board Accounting Standards Codification® (ASC) Topic 958, paragraph 958-205-55-21 provides an example financial statement. Note F states that the financial statements report certain categories of expenses that are attributable to more than one program or supporting function. These expenses require allocation on a reasonable basis that’s consistently applied. The expenses that are allocated include depreciation, interest, and office and occupancy, which are allocated on a square-footage basis as well as salaries and benefits, which are allocated on the basis of estimates of time and effort.

Do not-for-profits that are required to publish audited financial statements need to include the statement of functional expenses as part of the basic financial statements, or can the statement be presented as a schedule for additional analysis only?

Expenses by function and nature may be presented in the notes, statement of activities, or a separate statement. They can’t be provided as additional or supplementary information.

Won’t allocating support costs, like depreciation and CEO salary, to program activities be misleading because everyone will be doing it differently according to their institution’s culture and decision makers?

Costs must be allocated on a reasonable basis that’s consistently applied by the organization. However, each organization will likely be different, and one allocation method may not be a reasonable method for another organization. Regardless, the method for allocation should be disclosed and consistent from year to year.

Is there a way to allocate depreciation to functional areas when historic depreciation records aren’t tied to functional departments?

It may not be possible to allocate depreciation to functional areas for organizations that don’t have historical depreciation records tied to functional departments. In many cases, these records may relate to old assets that are either fully depreciated or close to being fully depreciated. Organizations will need to consider if their historical records are adequate to support their allocation methodology, especially in the first year of adopting the standard.

Can you provide an example of general activities or supporting expenses?

General activities of an organization will depend on each organization, but would include activities such as fundraising and human resource management. Supporting expenses usually include expenses such as accounting staff salaries. 

Do expenses that benefit donors, such as the fair value of donor benefits that are netted against special event revenue, get reported on the statement of functional expenses?

“To the extent that expenses are reported by other than their natural classification (such as salaries included in cost of goods sold or facility rental costs of special events reported as direct benefits to donors), they shall be reported by their natural classification in the functional expense analysis,” according to FASB ASC paragraph 958-205-45-6.

Investment Return

Will organizations be required to separate salaries for staff who work directly on investments and disclose these expenses as net from investment earnings rather than part of general salary expenses?

Yes. If the employee’s salary is considered a direct internal expense (in other words, an expense garnered in the direct conduct or supervision to generate investment return), it should be presented as net. However, organizations should consider materiality in their assessment. If the amount is relatively small, management may choose to keep the salary classified within expenses. We would suggest discussing this with your auditor if that’s the case to ensure management is comfortable with that decision before amounts are recorded.


Do not-for-profits need to disclose the value of contractual obligations and commitments to pay future faculty salaries or the funds set aside for start-up or interim faculty support?

If funds are designated by the board, these should be disclosed as net assets without donor restrictions. The disclosure should include the amount and purpose of the designation. If amounts aren’t designated, they don’t need to be disclosed under the new standard. Other accounting standards relating to commitments and contingencies should still be considered if there are commitments that may need to be disclosed.

We're Here to Help

If you have questions regarding the new reporting requirements or want further insight into how these changes will impact your organization, contact your Moss Adams professional.

Tammy Erickson has been in public accounting since 1993 and leads the Spokane office’s not-for-profit and government group. She provides accounting, auditing, and consulting services to higher education, quasi-governmental, health care, and other not-for-profit organizations. She can be reached at (509) 777-0149 or

Danielle O’Connor has been in public accounting since 2004. She focuses on providing assurance services to social service organizations, religious organizations, foundations, and institutions of higher education. She can be reached at (858) 627-1467 or

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