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Business and Policy Areas
Business and Policy Areas

FASB Could Require Direct Method Cash Flow Statement

December 10, 2013

At its October 23, meeting, the Financial Accounting Standards Board (FASB) tentatively decided to require not-for-profit (NFP) entities to use the direct method to present cash flows from operating activities in the Statement of Cash Flows (SoCF). The Board felt the direct method—already used to present cash flows from investing and financing activities—would improve the usefulness of the SoCF by providing more meaningful information to users of NFP financial statements. The Board also decided to eliminate the current requirement to provide a reconciliation of the change in net assets to net cash flows from operating activities (the indirect method).

FASB has done fairly extensive outreach with regard to changes in the SoCF, including discussions with both public and independent colleges and universities that use the direct method. Public institutions are required to present their SoCFs using the direct method. FASB also discussed this issue with its NFP Advisory Committee (NAC) and surveyed its NFP Resource Group (NFPRG). Of the 227 NFPRG members, 91 (40 percent) responded to a survey designed to obtain input from a broad group of constituents. The majority of survey respondents agreed that the direct method of reporting cash flows communicates information more effectively to their governing boards and other stakeholders. (Results of the survey appear on the FASB website.)

The Board also tentatively agreed to revise the current cash flow categories. The following chart shows the proposed changes.


Current Classification

Proposed Classification

Cash gifts restricted for the acquisition or construction of long-lived assets to be used for operating purposes.

Financing activities

Operating activities

Cash payments for the acquisition or construction of long-lived assets to be used for operating purposes.

Investing activities

Operating activities

Cash dividends and interest income.

Operating activities

Investing activities

Cash payments of interest expense.

Operating activities

Financing activities

It's important to note that the proposed changes in classification are predicated on the assumption that there will be a required intermediate measure of operation (see NACUBO Current article on this topic).

During a NAC meeting on December 9, a concern arose about a possible disconnection between the proposed operating performance metric and the SoCF as it relates to the acquisition of property, plant, and equipment (PP&E). Specifically, the tentative FASB decision would classify the receipt and disbursement of cash for PP&E as operating activities in the SoCF. That differs from how those activities are currently reflected in the statement of activities, and it is not clear how PP&E activities will flow through the FASB's proposed operating statement. NAC members expressed a strong desire for articulation between the operating statement and direct operating cash flows.

Impact on Higher Education

Because public colleges and universities are required to prepare the SoCF using the direct method, FASB's proposed changes would be a step toward comparability across all of higher education. NACUBO has learned from public institutions that, although the initial preparation of a direct method SoCF requires some additional, effort, on an ongoing basis, the effort to prepare the cash flow statement using the direct method is not significantly different than that to prepare it using the indirect method. Discussion at the December 9 NAC meeting confirmed that quantifying direct operating cash flows would not involve system changes to capture cash information. Rather, it would be a mapping exercise from existing systems to the various operating activities.

We have also heard from both public and independent institutions currently using the direct method that they spend considerably less time educating management, board members, and other stakeholders about how the SoCF works and more time analyzing the data presented in the statement.

This is the fourth web article in a new series covering FASB decisions designed to improve the NFP reporting model. NACUBO staff and members of its Accounting Principles Council will continue advising the Board on this project, remaining in close contact with FASB staff. Look for enhancements to NACUBO's accounting webpage to provide more project details and gather membership feedback in preparation for an industry response to proposed changes when an exposure draft is issued for comment. An exposure draft is expected to be issued before the fourth quarter of 2014. 


Sue Menditto
Director, Accounting Policy