Direct-method transition would require prompt attention

Public colleges and universities encountered challenges after making the switch with GASB Statement 34.
By Ken Tysiac

If FASB follows through with its plan to mandate a direct-method cash flow statement for not-for-profit entities, experts say financial statement preparers would be wise to address implementation quickly.

The transition from the indirect method to the direct method is familiar to financial executives at public colleges and universities, which underwent a similar change following the issuance in 1999 of GASB Statement No. 34.

“The implementation year takes a lot of effort,” said Cheryl Soper, CPA (inactive), controller and director of financial operations for the University of Michigan. “I recommend any not-for-profits preparing a direct-method statement for the first time not to wait until the last minute. You need to figure out if your systems contain the required attributes in a readily extractable format.”

Soper and University of Florida CFO Mike McKee, CPA, said the direct method does provide more information to financial statement users. But they said there is more work involved in preparing cash flow statements on an ongoing basis and that implementation required some work to figure out how to accumulate the appropriate information for each line on the direct-method cash flow statement.

“We had to take all these elements and map them over in our accounting system, so that when we’d go in to prepare the cash flow statement, they’d all kind of fall out in the right spot,” McKee said.

The first-in, first-out method the University of Florida uses for receivables created challenges on the revenue side under the direct method, said Brad Staats, the school’s controller.

“The indirect method is short and simple and very easy to prepare,” he said. “There is a cost of preparation on the direct method that is fairly sizable compared to the indirect method.”

If the change is approved, though, Soper said it would help create better comparability in the higher education sector because it would mean both private and public institutions would be reporting cash flows under the direct method. But she said preparers would need to be ready to move quickly with implementation.

“It will take more time to prepare in the first year,” Soper said. “And entities shouldn’t underestimate the amount of time it will take to prepare.”

Ken Tysiac (ktysiac@aicpa.org) is a JofA editorial director.

SPONSORED REPORT

How to make the most of a negotiation

Negotiators are made, not born. In this sponsored report, we cover strategies and tactics to help you head into 2017 ready to take on business deals, salary discussions and more.

VIDEO

Will the Affordable Care Act be repealed?

The results of the 2016 presidential election are likely to have a big impact on federal tax policy in the coming years. Eddie Adkins, CPA, a partner in the Washington National Tax Office at Grant Thornton, discusses what parts of the ACA might survive the repeal of most of the law.

COLUMN

Deflecting clients’ requests for defense and indemnity

Client requests for defense and indemnity by the CPA firm are on the rise. Requests for such clauses are unnecessary and unfair, and, in some cases, are unenforceable.