FASB Takes Preliminary Steps to Change NFP Reporting
October 31, 2013
Largely as a result of recommendations made by the FASB Not-for-Profit Advisory Committee (NAC) in November 2011, the Financial Accounting Standards Board (FASB) added a project to its agenda to improve financial reporting for not-for-profit (NFP) entities. Although little activity occurred until mid-2013, the FASB staff and board have participated in several education sessions on financial reporting enhancement matters identified by the NAC. Subsequent Board meetings have resulted in tentative decisions that could significantly impact financial reporting by independent institutions. These preliminary decisions, outlined below, will serve as the basis for an exposure document for public comment, which is expected to be issued before the fourth quarter of 2014.
Impetus for Change
The NAC identified areas for improvement to the current financial reporting of NFPs. Their initial recommendations included:
- Revisiting current net asset classifications. The hope is that relabeling or redefining net asset classifications would improve how liquidity is portrayed and clear up current confusion concerning restrictions and the definition of unrestricted net assets.
- Improving the relationship between the statements of activities and cash flows to more clearly communicate financial performance through these two statements. One recommendation included a measure of operations in the statement of activities.
Preliminary Decisions to Date
Based on the NAC's advice, the FASB staff began preparing recommendations for the Board's consideration. FASB discussions to date have focused on:
Defining and presenting a measure of operations, including changes to the presentation of the Statement of Activities. The Board tentatively decided to define an intermediate operating measure on the basis of two key dimensions:
- A mission dimension. This would be based on whether resources are related to the NFP's primary mission. Items such as proceeds from investing activities would not be included in operations, unless the NFP's primary mission was to generate return on investments.
- An availability dimension. This would be based on whether resources are available for current period activities and would reflect both external limitations and internal actions of an NFP's governing board.
In addition, the Board tentatively decided to support a statement of activities format that would present all legally available mission-related revenues on a gross basis. Amounts designated by the governing board for use in future periods would then be shown as reductions. In addition, the presentation would include amounts of previously unavailable resources that the governing board made available for use in the current period.
The Board has not yet decided whether the presentation of an intermediate operating measure would be required, permitted, or encouraged.
Revisiting the current net assets classes. The Board tentatively decided to replace the three classes of net assets currently required with two classes of net assets: those with donor-imposed restrictions and those without. This would essentially remove the hard-line distinction between temporary restrictions and permanent restrictions. NFPs would be required to describe differences, focusing on both how and when the resources can be used.
NFPs would also be required to disclose information about the amount and purposes of board designations of net assets without donor-imposed restrictions. Clarifying spending availability will become an important disclosure for colleges and universities.
Presentation of the Statement of Cash Flows. The Board tentatively decided to require NFPs to present cash flows from operating activities using the direct method and to remove the requirement to provide a reconciliation using the indirect method. In the Board's view, cash flows presented using the direct method were easier to understand and more meaningful to management, boards, and other users of NFP financial statements.
For similar reasons, the Board also tentatively decided to realign the classification of certain elements in the cash flow statement, including:
- Interest and dividends received as investing cash flows, rather than operating
- Interest paid as financing cash flows, rather than operating
- Gifts for and purchases of fixed assets as operating cash flows, rather than financing/investing
How best to address liquidity within the financial statements remains on the Board's agenda. Although preliminary discussions have included the requirement to present a classified balance sheet and the segregation of assets that are restricted by donor, law, or designation by an NFP's board, the Board has not made tentative decisions on this topic.
Also on the table is the statement of functional expenses. Currently, only voluntary health and welfare organizations must provide this statement. The Board will consider whether to extend that requirement to a larger group of NFPs—principally, those deriving a significant portion of their revenue and support in the form of contributions from the general public. This requirement would likely not apply to higher education institutions, where the majority of revenue comes from tuition, grants and contracts, and returns on endowment assets.
NACUBO staff and members of its Accounting Principles Council will be in close contact with FASB staff as they continue advising the Board on this project. NACUBO will enhance its accounting webpage to provide greater project details and gather membership feedback in preparation for an industry response to proposed changes when an exposure draft is issued for comment.
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