FASB proposes significant changes to not-for-profit reporting

By Christopher Cole, CPA/CFF, CGMA, and Ken Tysiac

Not-for-profit financial statement preparers would experience significant changes in practice as a result of new standards proposed Wednesday by FASB.

FASB issued the long-awaited proposed Accounting Standards Update (ASU), Not-for-Profit Entities (Topic 958) and Health Care Entities (Topic 954): Presentation of Financial Statements of Not-for-Profit Entities.

The proposed standards would represent the most significant changes in not-for-profit (NFP) reporting rules since 1993, when FASB issued Statement No. 116 and Statement No. 117. Since that time, many stakeholders have said standards for not-for-profits should require reporting of a standard operating measure.

FASB’s Not-For-Profit Advisory Committee recommended that the board make changes to better serve the needs of financial statement users. FASB sought to make NFPs more comparable through their financial reporting, and to provide donors and lenders with liquidity information so they could better assess the financial health of the NFPs they are interested in supporting or making a loan to.

“These changes will refresh the [reporting] model in ways that will make not-for-profit financial statements even more useful to donors, lenders, and other users,” FASB member Larry Smith, CPA, said in a statement.

The proposal would change net asset classification requirements, and information presented about an NFP’s liquidity, financial performance, and cash flows. The proposed changes would include:

  • All NFPs would be required to report expenses by both their nature and function. Currently, only voluntary health and welfare organizations have such a requirement. The proposal would allow flexibility to present expenses by function and by nature on the face of the statement of activities, as a separate statement, or within the notes.
  • A net presentation of investment expenses against investment return would be required on the face of the statement of activities. External and direct internal investment expenses would be netted against the investment return. The related requirement to disclose external investment expenses that were netted against investment returns would be removed. Internal salaries and benefits expenses netted against investment returns would be required to be disclosed.
  • NFPs would be required to present two intermediate operating measures as defined on the basis of two key dimensions:
    • A mission dimension based on whether resources are from or directed at carrying out an NFP’s purpose for existence.
    • An availability dimension based on whether resources are available for current-period activities and reflecting both external limitations and internal actions of an NFP’s governing board.
  • NFPs would be required to use the placed-in-service approach for the treatment of expiration of restrictions related to long-lived assets, thus eliminating the option to release the donor-imposed restriction over an asset’s estimated useful life.
  • The three existing net asset classes (permanently restricted, temporarily restricted, and unrestricted) would be replaced with two net asset classes (net assets with donor restrictions and net assets without donor restrictions).
  • The amount of endowment funds that are underwater would be reported within the proposed “with donor restrictions” class of net assets (rather than within the unrestricted class of net assets as currently required). In addition to disclosing the currently required aggregate amount by which funds are underwater, an NFP also would be required to provide additional disclosures about the original gift amount, current fair value, and organizational spending policies.
  • The direct method of reporting cash flows for operating activities would be required. The requirement to reconcile the change in net assets to net cash flows from operating activities, often referred to as the “indirect method,” would be removed. Several cash flow items also would be reclassified into different categories.
  • NFPs would be required to provide quantitative and qualitative information useful in assessing liquidity, including a description of the time horizon used to manage its liquidity.

Comments on the proposal can be made through Aug. 20 at FASB’s website.

Christopher Cole ( ccole@aicpa.org ) is AICPA senior technical manager for not-for-profit content development and staff liaison to the AICPA Not-for-Profit Entities Expert Panel. Ken Tysiac ( ktysiac@aicpa.org ) is a JofA editorial director.

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