An NFP's notes show a 4 million net assets with donor restrictions. The auditor traces the $1 million gap, finds an underwater endowment loss never disclosed, and the management letter cites a material weakness over financial close.
ASU 2016-14 (FASB Subtopic 958-205) tightened the note disclosure requirements for nongovernmental NFPs. The notes are not optional commentary. Several disclosures are required by GAAP, and missing or wrong notes are a financial reporting deficiency, not a presentation choice.
The Representative Task for I.B4 is narrow: adjust the notes to correct identified errors and omissions. To do that, you need to know which disclosures are required, what each one must contain, and how the notes tie back to the statements.
A nongovernmental NFP cannot communicate its financial position through net income alone, since there is no owner equity, no stock price, and no profit motive. Donors, grantmakers, and watchdog rating agencies (Charity Navigator, GuideStar) read the notes to judge whether the organization can deliver on its mission.
Common mistakes
- Disclosing only the total of net assets with donor restrictions. ASU 2016-14 requires the breakdown by purpose, time, and perpetual. A single line "$7,200,000 with donor restrictions" is a GAAP departure. Trap answer: the face statement total presented as the note disclosure.
- Including board-designated funds in the liquidity calculation. They sit in "without donor restrictions" but are NOT available for general expenditures. A $1,000,000 quasi-endowment included in available liquidity overstates the figure by $1,000,000.
- Reporting endowment at original gift amount when underwater. Endowment investments are reported at fair value, NOT at the donor's original gift amount. A $5,000,000 corpus with $4,000,000 fair value reports $4,000,000 on the statement and discloses the $1,000,000 deficiency in the underwater note.
Bottom line
- ASU 2016-14 requires note disclosure of net asset composition, donor restrictions, board designations, and quantitative plus qualitative liquidity
- Net assets with donor restrictions must be disaggregated by type (purpose, time, perpetual); a single-line total is a GAAP departure
- Functional expense allocation methodology must be disclosed when the matrix appears in the notes rather than a separate statement
- Endowment notes must include a roll-forward by net asset class plus underwater disclosure when fair value falls below original gift (UPMIFA)
Exam shortcut
When a question gives you note disclosures and statement totals that don't tie, start with the notes, since they are usually the side that is wrong: the trial balance drives the statements but the notes require manual assembly. If a question describes net assets with donor restrictions as a single number, look for the missing breakdown by purpose/time/perpetual, that's the trap.
The full lesson (about 2,578 words, 17 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- I.B4
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