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Business and Policy Areas
Business and Policy Areas

FASB Issues Proposal to Improve Not-For-Profit Financial Reporting

May 4, 2015

The Financial Accounting Standards Board (FASB) recently issued a proposed Accounting Standards Update (ASU) intended to improve the information provided in not-for-profit financial statements and notes to financial statements. The proposed ASU titled, "Presentation of Financial Statements of Not-for-Profit Entities," sets forth FASB's suggested improvements to a reporting model that has been used by independent higher education institutions since the mid-1990s.

Recommended changes would:

  • Replace the three classes of net assets with two classes: those with donor-imposed restrictions and those without. Underwater endowment accounting and reporting would also change. Underwater amounts would flow through the "with donor restrictions" net asset class, a treatment more closely aligned with uniform endowment laws that avoids confusion on net asset constraints when markets decline.
  • Require an operating performance measure based on mission and availability. These constructs address whether resources are related to the not-for-profits (NFPs) primary mission, and, if so, are available for current period activities. On the face of the statement of activities (SOAs), NFPs would have to present two additional subtotals of the operating activities that are associated with changes in net assets without donor restrictions. The first subtotal would include all activities associated with mission; the second would reflect adjustments for availability.
  • Increase transparency by highlighting governing board designations related to legally available resources. Internal governing board designations would 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. The second operating subtotal on the SOA would reflect both types of transfers.
  • Redirect how capital-related activities flow through the SOA. Gifts restricted to Property, Plant and Equipment 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, reflected in the first operating subtotal, and reclassified to the non-operating section. The reclassification adjusts the second operating subtotal and 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 cash flows from operating activities to be presented using the direct method in the Statement of Cash Flows. This would realign certain elements in the cash flow statement as follows:
    • 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.
  • Require NFPs to present expenses by both functional and natural classifications within their financial statements.
  • Require new or changed disclosures related to net investment return, liquidity, underwater endowment funds, governing board designations, and the relationship between natural and functional expenses as follows:
    • 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.
    • NFPs would have to provide quantitative and qualitative liquidity disclosures that address restrictions, risk, and liquidity management–including demands resulting from near-term financial liabilities.
    • In addition to disclosing the currently required aggregate amount by which funds are underwater, require an NFP to disclose the aggregate of the original gift amounts (or level required by donor or law) for such funds and any governing board policies or decisions to spend or not spend from such funds.
    • A description of the purpose, amounts, and types of governing board designations and transfers that result in the addition or removal of resources without donor-imposed restrictions. Period-end balances of net assets without donor restrictions that result from governing board actions should include qualitative and quantitative information.
    • An analysis of the relationship between natural and functional expenses would be required, 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, could be functionalized, but there would be no requirement to do so.

On Tuesday, May 12, from 1:30 to 3:10 p.m. EDT, FASB will host an educational webinar that will provide an in-depth look at the proposed ASU. IN FOCUS: FASB's Proposed Changes to the Not-for-Profit Financial Statement Model will examine specific amendments in the proposal and what feedback the Board seeks from stakeholders. Comments on the proposed ASU are due by Aug. 20.


Sue Menditto
Director, Accounting Policy