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Business and Policy Areas
Business and Policy Areas

FASB Clarifies Earlier Decision and Receives Not-for-Profit Advisory Committee Input

September 18, 2014

In anticipation of issuing an exposure draft on the Not-for-Profit Financial Reporting Project, board members and staff of the Financial Accounting Standards Board (FASB) sought feedback from their Not-for-Profit Advisory Committee (NAC) on the tentative decisions made to date. In particular, the Board was interested in the perceived benefits, costs, and complexities of the decisions when looked at holistically. As a result of those discussions, there may be delays in the issuance of an exposure draft currently scheduled to be released before the end of this year.


The NAC felt that some of the decisions to date would be beneficial in improving the overall transparency and understandability of the financial statements. These included:

  • Collapsing the current three net asset classes into two: net assets with donor restrictions and net assets without donor restrictions. Specifically, eliminating the term "unrestricted" would reduce confusion that exists today for net assets without donor restrictions.
  • Requiring presentation of an operating metric would provide comparability among not-for-profits (NFPs). In addition, a required measure of operations would put more focus on availability in terms of operating revenues.
  • Requiring that expenses be shown by natural classification as well as function will provide information that would interest many users.
  • Removing the requirement to reduce unrestricted (or net assets without donor restrictions) for underwater endowments made sense—especially in the context of UPMIFA.
  • Requiring the direct method of presenting cash flows from operating activities and removing the requirement to present the indirect method reconciliation were both perceived as big benefits to users of the statements. Nearly all NAC members agreed that the indirect method added nothing to the understandability of the financial statements.

Costs and Complexities

Although NAC members felt that many of the tentative decisions would be beneficial, there was still considerable concern about cost and complexity in the following areas:

  • The degree of flexibility permitted to show transfers for board designations and appropriations.
  • Transfers out of current period operations for unrestricted gifts of long-lived assets with incremental transfers back into operations as the assets are used in subsequent periods.
  • Cluttering the face of the statement of activities with board and capital transfers.
  • Including gifts of long-lived assets in the operating section and interest expense in the financing section of the cash flow statement.

Incomplete decisions regarding the treatment of capital assets in the statement of activities (funded wholly or partially by donor restricted gifts) made it impossible for NAC members to address cost and complexity.

Areas of Concern

Significant time was spent on proposed transfers for board designations and capital transactions on the statement of activities as concerns and possible solutions were discussed. In general, NAC members understood the desire of the Board to provide flexibility in presenting an operating measure through the use of transfers. The concerns, however, were that the transfers actually created confusion—and, hence, complexity.

For transfers related to governing board designations, NAC members acknowledged that decisions about the use of resources by an NFP are important in understanding stewardship and sustainability. Many NAC members, however, felt that showing these as transfers on the statement of activities was not the right solution. In fact, some NAC members felt that these were balance sheet transactions and, therefore, inappropriate to be shown on the statement of activities. Suggestions were made about possibly moving this detail to the footnotes in order to avoid "muddying up" the face of the statements.

There was also a great deal of concern regarding proposed changes in categorization of certain items on the statement of cash flows. There was consensus that if changes would not be made for all entities—for-profit and not-for-profit—there would be no value in those changes.

By far the greatest area of apprehension was the presentation of capital transactions in the statement of activities. Many NAC members communicated their concerns about capital assets being included to any extent within an operating metric. The proposed treatment of an unrestricted gifted capital asset would be to transfer to operations the portion of the asset to be used in the current period, thereby offsetting the current period depreciation. It was pointed out that, while depreciation may be a period expense, the offset is not the cost of the asset, but rather, the revenue that is derived from the use of the asset. As such, amounts related to the cost of the asset should not be considered operating activities. Further, many NAC members explained that capital gifts more closely resemble investing activities—expanding an NFP's capacity to provide future services, generate future revenues, or both—and, thus, are not operating activities of any period.

Clarification of Earlier Decision

During the meeting, FASB staff clarified a decision regarding the treatment of capital transactions that may have been miscommunicated and was misunderstood by constituents. As a result of that misunderstanding, an August 25, 2014, NACUBO Current incorrectly expanded application of the proposed treatment to all capital assets funded in whole or in part by donor contributions. That treatment would involve releasing donor restricted amounts into operations when an asset was placed in service and then transferring out of operations the portion related to the use of the asset in future periods.

In subsequent periods, the portion of the asset to be used in current period operations would be transferred from non-operating to operating in the statement of activities. FASB staff clarified that the treatment described above would apply only to an unrestricted gift of a capital asset that the governing board designates for use in operations. The Board has not yet decided if the treatment described above would apply to capital assets purchased or constructed with donor restricted funds, or donor restricted gifts of capital assets. Further, to date, the only decision made about how capital assets purchased or constructed with donor restricted funds would be shown in the statement of activities is that the donor restriction is released when the asset is placed in service. (This would effectively eliminate the current alternative of "bleeding into operations" a portion of the restricted contribution over time as depreciation is recognized.) As a result of this clarification, the article included in NACUBO Current has been removed from the NACUBO website.

Because the treatment of capital assets from all sources has not been completely deliberated by the Board, it was difficult for NAC members to comment on the possible cost and complexity of those transactions, (i.e., how or whether donor contributions for capital assets, purchased or constructed, affect operations has not yet been discussed or decided). Since donor funding for the acquisition or construction of capital assets is more common than unrestricted capital gifts that are used in operations, preliminary decisions will affect cost and complexity considerations. The extent of NAC discussion and the need for further decisions on the treatment of donor gifts (or other nonexchange support) for the acquisition or construction of capital assets led many NAC members to recommend that the Board spend more time deliberating before moving forward with an exposure draft (ED). Concern was expressed that if these more contentious decisions weren't dealt with before an ED was issued, they could detract from the beneficial aspects of the project.

The Board was scheduled to meet again on this topic at its September 17 meeting, but that has been rescheduled to October 8. NACUBO staff continues to work closely with FASB staff as the project progresses.

This article is the eighth in an online series covering FASB decisions that are designed to improve the NFP reporting model. Topics addressed include:

  1. Mission and availability
  2. Gross and net presentation
  3. Net asset classes
  4. Direct method cash flows
  5. Functional expenses
  6. Other communications
  7. Investment expenses 


Sue Menditto
Director, Accounting Policy