NFP Financial Reporting Changes Series: Topic 2 – Functional expense changes and cash flow statement changes

by Megan Hiles
Photo of $100 bills, fanned out in a stacked fashion on a surface.

Topic two rounds out our NFP Financial Reporting Changes series! To recap, in 2011 the FASB began a project to improve Not-for-Profits’ (NFPs’) financial reporting after concluding that the existing standards are sound but that it was time to determine improvements that could be made.  In 2015, the FASB presented its findings/improvements to the public and received significant and mixed feedback. As a result the FASB decided to divide the project into two phases. Our series covers the major Phase 1 changes at a high level: (1) net asset classification changes, (2) expense changes, (3) availability and liquidity and (4) cash flow changes. Click here to revisit topic one: Net asset classification and disclosures.

Reporting of expenses by function and nature

The new standard requires NFPs to report expenses by function and nature in one location – statement of activities, schedule in the notes or a separate financial statement. The most common items that are included in the statement of functional expenses are (1) direct donor benefits netted against special events revenue and (2) expenses included in the cost of goods sold (i.e. salaries and benefits). The main takeaway is that this schedule is now required for all NFPs. In the past this was only required for voluntary health and welfare agencies. For every other type of NFP this schedule was optional.

Presentation of investment expenses and return

Currently investment expenses that are netted as part of overall investments must be disclosed. The new standard requires NFPs to net investment expenses against investment return, but no longer requires disclosure of the amount of investment expenses or the components of gross investment return. The items that are considered related investment expenses that can be netted include external investment expenses and direct internal investment expenses. These changes to the presentation of investment return are also more in line with the total return concept in UPMIFA.

Liquidity and availability disclosures

Many NFPs run lean and survival depends upon donations raised and cash flow generated to expend on general options related to the primary mission. There are times when an NFP may have a lot of cash, but it’s not available due to certain restrictions placed by donors. In 2008, the year of the great recession, this became an issue when NFPs noticed a decline in giving and still had to pay for general operations. What became apparent was that the net assets of NFPs do not really tell the whole story. Many NFPs were asset rich but extremely illiquid, meaning the assets were not available for use – this is referred to as liquidity risk. The users of the financial statements recommended to FASB that NFPs disclose the total net assets and then reconcile to the net assets that can be spent within one year in order to help them better assess the liquidity risk of any given NFP. The new standard now requires both quantitative and qualitative disclosures related to liquidity and availability.


This information should focus on how an NFP manages its liquid resources that are available to meet cash needs for general expenditures within one year of the balance sheet date. When preparing the qualitative disclosures on liquidity consider the following items (1) How does the NFP manage cash in excess of daily requirements? (2) Is there a liquidity reserve? What is the balance? (3) Are there board designated funds that may be available if needed? (4) Are there available lines of credit?


The best place to start when preparing the quantitative disclosure would be the balance sheet. The balance sheet already shows current and non-current assets. So anything that is non-current would not be available within one year. This leaves everything else within the current section open which then needs to be evaluated. For the current assets it must be determined what restrictions, if any are placed on those assets. Overall, this disclosure may be the most time-intensive for NFPs to understand and implement.

Statement of cash flows

Under the new standard NFPs still have the option to present cash flows in the direct format, however the majority of NFPs present cash flows in the indirect format. Currently, if a NFP presents the statement of cash flows using the direct method there is the requirement to reconcile the direct version to the indirect version. So essentially, the NFP would need to prepare both types of cash flows. Due to this, NFPs and many other organizations – say why bother? In the new standard, the FASB eliminated the requirement for NFPs to reconcile the statement of cash flows to the indirect version, if they present using the direct version. This may be incentive enough for NFPs to begin presenting the statement of cash flows using the direct method.

Effective dates and transition

The standard becomes effective for annual periods in fiscal years beginning after December 15, 2017 and interim periods in fiscal years beginning after December 15, 2018. NFPs are permitted to early adopt the standard immediately. The changes to the financial statements must be retrospective, meaning changes to prior years, however comparative statements may omit the additional disclosures about liquidity and availability for the prior years.

Overall, the new standard is extremely comprehensive. The FASB hasn’t changed the standard related to NFPs in over 20 years. Its imperative that NFPs be proactive in reaching out to CPAs, legal counsel and bankers in order to gain a solid understanding of the new standard and its impact on their organization.