In April 2015, the Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update (ASU) that would significantly impact nearly all not-for-profit organizations. The proposed changes are intended to improve existing presentation requirements for financial statements of not-for-profits, with the goal of providing more useful information to the users of these financial statements.
The proposed ASU addresses the following key issues:
- Complexity and understandability of net asset classifications;
- Liquidity of not-for profit organizations;
- Inconsistent reporting of intermediate measure of operations;
- Lack of consistency in the type of information provided about expenses of a period; and
- Misunderstandings about and opportunities to enhance the utility of the statement of cash flows.
Let’s take a closer look at each of these items and how the ASU proposes to change them.
Net Asset Classification
Under current guidance, not-for-profits are required to present the amount for three classes of net assets (unrestricted, temporarily restricted, and permanently restricted) on the face of the statement of financial position. The proposed ASU would retain the requirement to provide information regarding the amount and nature of restrictions; however, to reduce complexity in financial reporting, only two classes of net assets (those with donor restrictions and those without) would need to be presented. Additional disclosures would be required to divulge board designations and other limits stipulated by donors.
The proposed ASU would also change the presentation of underwater amounts of donor-restricted endowment funds. The proposed standard would require these funds to be included in net assets with donor restrictions whereas current guidance requires underwater endowment funds to be reported in unrestricted net assets.
The proposed ASU includes the requirement to disclose both quantitative and qualitative information regarding the liquidity of assets and near-term demands for cash as of the reporting date. Not-for-profits would be required to disclose the amount of financial assets at the end of each period and the amount of those assets that, because of restrictions or limitations on their use, are not available to meet cash need in the near term. Additionally, not-for-profits would be required to disclose the amount of financial liabilities that require cash in the near term and the methods (including time horizon) used to manage its liquidity.
Measure of Operations
Currently, any change in each of the three classes of net assets is required to be presented on the statement of activities. Under the proposed ASU, a not-for-profit would continue to report the amount of any changes; however, they would be reported in just two classes of net assets.
The proposed ASU would also require presentation of two subtotals to be used for measuring operating activities related to changes in net assets not subject to donor restrictions.
- The first subtotal would include operating revenues, support, expenses, gains and losses that are without donor-imposed restrictions and before internal transfers.
- The second subtotal would include the effects of internal transfers resulting from governing board designations, appropriations, and similar actions that place (or remove) self-imposed limits on the use of resources that make them unavailable (or available) for current-period operating activities.
Reporting of Expenses
Not-for-profits would be required to present investment returns net of related external and direct internal expenses under the proposed ASU.
Additionally, all not-for-profits would be required to present expenses by both nature and function. Currently, only health and welfare organizations are subject to this requirement. The proposed changes would give not-for-profits the option to present this information one of three ways: in the statement of activities, as a separate statement, or in the notes to the financial statements. Enhanced disclosures would be required in order to explain the methods used to allocate expenses across functions.
The proposed ASU would require not-for-profits to use the direct method of accounting to present operating cash flows. Additional presentation of the indirect method would be permitted but no longer required. Additionally, certain items reported in a statement of cash flows would be re-categorized to better align operating measures with the statement of activities.
The proposed ASU is currently out for review, with written comments due to FASB by August 20, 2015. Once FASB considers all the submitted feedback, it will set an effective date. RKL’s Not-for-Profit Industry Group will continue to monitor the progress of these proposed changes as they move through the approval process.
Not-for-profits with questions about how these proposed changes would affect their accounting and record-keeping procedures should contact Douglas L. Berman, Not-for-Profit Industry Group leader at 717.843.3804 or firstname.lastname@example.org.
Contributed by Erika R. Schachle, CPA, supervisor in RKL’s Audit Services Group. Erika specializes in serving the accounting needs of not-for-profit organizations, including financial reporting and GAAP audits.