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.
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.
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.
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.
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.
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.