FASB proposes changes to not-for-profit reporting
Posted On: 6-12-2015 | Posted By: Lee Merrick, CPA
For the first time in more than 20 years, the Financial Accounting Standards Board proposed a change to the financial reporting model for not-for-profit entities. The goal of the proposed standards is to make not-for profit financial statements more comparable among organizations and more useful to lenders, donors, and other users of the financial statements.
In April 2015, FASB issued the proposed Accounting Standards Update, Not-for-Profit Entities (Topic 958) and Health Care Entities (Topic 954): Presentation of Financial Statements for Not-for-Profit Entities. The proposal includes changes to the current net asset classification requirements and information presented in the financial statements about an organization’s liquidity, financial performance and cash flows.
As a preparer or user of not-for-profit organization’s financial statements you should be aware of the following proposed changes.
Statement of Financial Position
The statement of financial position would present two net asset classes (net assets with donor restrictions and net assets without donor restrictions), instead of the three net asset classes (unrestricted, temporarily restricted, and permanently restricted) currently required to be presented. In essence, the proposed standard would combine the temporarily and permanently restricted net assets into one classification.
Statement of Activities
The change in each of the two proposed net asset classes described above would be presented on the statement of activities, instead of the three net asset classes currently required. The change in total net assets for the period would continue to be reported.
Two additional subtotals would be presented for operating activities on the face of the statement of activities that are associated with changes in net assets without donor restrictions.
- First subtotal: Operating activities for the period, which would include inflows and outflows directed at carrying out the organization’s purpose for existence, such as operating revenues, support, expenses, gains and losses before internal transfers.
- Second subtotal: Other activities, which would include internal transfers from board designations, appropriations, and similar self-imposed designations.
All not-for-profits would be required to present expenses by both their nature and function on either the face of the statement of activities, in a separate statement, or within the notes of the financial statements. The financial statements would also include an improved disclosure about the methods used to allocate costs among functions.
The statement of activities would present external and direct internal investment expenses netted against investment return on the face of the statement, and internal salaries and benefit expenses netted against investment returns would be required to be disclosed in the financial statements. The current requirement to disclose external investment expenses netted against investment returns would no longer be required.
Long-lived assets would be required to use the placed-in-service approach for the treatment of expiration of restrictions. The option to release the donor-imposed restriction over an asset’s estimated useful life would no longer exist.
Underwater endowment funds would be reported within the proposed “with donor restrictions” class of net assets, rather than presented within the unrestricted class of net asset as underwater funds are presented under the current requirement. Additional disclosures about the original gift amount, current fair value, and organizational spending policies would be required in addition to the current required disclosure of the aggregate amount of funds underwater.
Cash Flows Statement
The statement of cash flows for operating activities would be required to be presented using the direct method of reporting, and the requirement to present the indirect method, which reconciles the change in net assets to net cash flows from operating activities, would be removed.
Several cash flow items would be presented in different categories than they are classified under the current guidance in attempt to classify the cash flows in ways that are more consistent with the statement of activities classifications.
The FASB proposes required quantitative and qualitative information useful in assessing liquidity, including a description of the financial assets available to meet near-term demands for cash, including financial liabilities, as of the reporting date.
Comment period until August 20
The exposure draft is available for review and comments to the FASB about the proposed changes to the not-for-profit reporting model until August 20, 2015, at the FASB’s website. The effective date for the proposed changes will be determined by the FASB after the comment period has ended.
If you would like additional explanation of the impact these proposed changes could have on your organization, contact your WK advisor at (573) 442-6171 or (573) 635-6196.