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Nonprofit Financial Statements: Change is Coming

PB maresThis March, the Financial Accounting Standards Board (FASB) – the organization that establishes financial accounting and reporting standards – will release a first draft of the new financial reporting changes for non-profit organizations. The good news: everyone in the non-profit space can have a voice in accepting or rejecting the changes. It is highly recommended that all non-profits and financial statement users share their opinion with FASB – good, bad, or otherwise – since it will impact reporting requirements.

FASB officials have been meeting since May 2013 to discuss reform for non-profit financial statements. The major changes being proposed affect the presentation of net assets, liquidity, the statement of activities, functional expenses, and required disclosures. The proposed changes are summarized below.

Net Assets

This is the biggest change. The number of net asset classifications has been reduced from three to two and no longer will non-profits have to distinguish between temporarily and permanently restricted net assets. Under the proposed standards, non-profits will have to classify net assets as either with or without donor-imposed restrictions. The FASB wants to increase the amount of disclosures around donor-imposed net assets so the user knows how and when the restrictions can be lifted. The purpose for this change is for the readers of the financial statements to have a clearer picture on the accessibility of the non-profit’s net assets.

Statement of Activities

In addition to the changes in net asset categories, the FASB wants to further clarify and separate operating measures from non-operating measures. The term operating measures means revenues and expenses directly related to the non-profit’s mission that are for the current period but not subject to donor-imposed restrictions. Distinguishing operating measures should give the reader a better picture of the non-profit’s financial standing.

Liquidity/Cash Flow

The FASB has proposed that all non-profits must use the direct method for the statement of cash flows. If they want to continue to use the indirect method they can but in addition to the direct method presentation. The point is readers should get more out of seeing the direct in-flows and out-flows of cash, versus a reconciliation of the change in net assets to the cash balance.

Functional Expenses

Under the new proposed requirements, the FASB will require all non-profits to show operating expenses by functional class. The proposed presentation options would allow the non-profit to present this in a separate schedule, or combined on the statement of activities. This change is designed to provide another level of transparency to the readers.


In addition to further disclosures related to the above, there are also tentative changes to investment reporting and extended disclosure related to underwater endowments.

Remember, all nonprofits and their stakeholders are encouraged to comment on the FASB’s draft in shaping the final document. Once the draft is released, visit to provide your insight.

Garner, BoThe preceding is a guest post by Bo Garner. Bo Garner, CPA, MBA, is an Audit Supervisor at PBMares, LLP and is the leader of the firm’s Not-for-Profit team. PBMares is a regional accounting and business consulting firm serving clients throughout the Mid-Atlantic. For more information, please contact the author at or visit our website.

Topics: Policy