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FASB Drafting Proposal on NFP Reporting

March 20, 2015

At its March 4 meeting, the Financial Accounting Standards Board (FASB) directed its staff to proceed with the Exposure Draft (ED) of the proposed Accounting Standards Update, "Presentation of Financial Statements of Not-for-Profit Entities." The ED is expected by mid-April with comments due by July 31. The Board's decision follows feedback received on a pre-ballot external review document and a meeting of the Not-for-Profit Advisory Committee (NAC).

The exposure draft is a long-anticipated document that will propose display and performance measurement changes to the current NFP reporting model, which independent colleges and universities have used since 1995.

The changes likely to be proposed would:

  • Require an operating performance measure based on mission and availability. These constructs address whether resources are related to the NFP's primary mission, and if so, are available for current period activities. For example, all legally available mission-related revenues would flow through the operating section of the statement of activities (SOA). Revenue not available in the current period would be recognized in the non-operating section of the SOA.
  • Increase transparency by highlighting governing board designations related to legally available resources. Such internal decisions can be made by trustees or their designees. Internal governing board designations can be displayed as "transfers to" or "transfers from" operations. For example, a governing board designation of an unrestricted gift to "funds functioning as endowment" would be shown as a transfer from operating to non-operating on the SOA. Similarly, amounts designated for spending from "funds functioning as endowment" would be shown as transfers from non-operating to operating on the SOA.
  • Replace the currently required three classes of net assets with two classes of net assets: those with donor-imposed restrictions and those without. In addition, underwater endowment accounting and reporting would change. Underwater amounts would flow through the "with donor restrictions" net asset class. This treatment more closely aligns with uniform endowment laws and avoids confusion on net asset constraints when markets decline.
  • Require cash flows from operating activities to be presented using the direct method in the Statement of Cash Flows. Certain elements in the cash flow statement would be realigned:
    • Interest and dividends received would be investing, rather than operating, cash flows.
    • Interest paid would be a financing, rather than an operating, cash flow.
    • Gifts for, and purchases of, fixed assets would be operating, rather than financing/investing cash flows.
  • Redirect how capital-related activities flow through the SOA. Gifts restricted to Property, Plant and Equipment (PP&E) would be recognized as an increase in net assets with donor restrictions. When the asset is placed in service, the restriction would be released to the operating section of the SOA and then reclassified to the non-operating section. The reclassification occurs because the long-lived asset is a resource that is not wholly available for use in the current reporting period. Rather, current period use is recognized through depreciation expense (an operating expense).
  • Require NFPs to present expenses by both functional and natural classifications within their financial statements. An analysis of the relationship between natural and functional expenses would be necessary, but the format would not be prescriptive. All expenses—both operating and non-operating—would be required to appear in the analysis. Non-operating expenses, such as interest expense, would not need to be functionalized.
  • Require new disclosures related to liquidity and net investment return. Although a net presentation of investment returns would be required on the face of the SOA, the current requirement to disclose the amount of netted investment expenses would be eliminated and replaced with a disclosure of internal salaries and benefits for personnel directly involved in the investment area. Quantitative and qualitative liquidity disclosures will attempt to address restrictions, risk, and how NFP entities manage liquidity.

NACUBO's Accounting Principles Council will discuss higher education's reactions to the proposed changes at a public meeting on March 31. Additional information on the project can be found in the February issue of Business Officer and in past accounting news stories.

Contact

Sue Menditto
Director, Accounting Policy
202.861.2542
E-mail