Accounting standards for not-for-profit entities have been changed for the first time in more than 20 years. Accounting Standards Update (ASU) No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities, applies to a wide variety of organizations, including charities, educational institution foundations, and cultural, religious and trade-related nonprofits.

The updated standard will reduce the number of net asset classes from three (unrestricted, temporarily restricted and permanently restricted assets) to two:

1. Net assets with donor restrictions, and

2. Net assets without donor restrictions.

The updated standard also includes important changes related to reporting liquidity, expenses, investment returns and cash flows. For example, the new standard requires less detail when choosing between the direct and indirect cash flow methods.

In addition, organizations can now access funds from a permanently restricted endowment, even if its value has dropped below its initial amount. The amount that the endowment is “underwater” will be classified as net assets with donor restrictions instead of as unrestricted net assets. Additional disclosures regarding underwater endowments are required. Contact your CPA for more information.