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Business and Policy Areas
Business and Policy Areas

FASB Told to Rethink Proposed NFP Reporting Changes

October 19, 2015

Through comment letters, public roundtables, and educational sessions, the Financial Accounting Standards Board (FASB) received significant, and sometimes diverse, feedback on its Not-for-Profit (NFP) financial reporting proposal. FASB received 264 comment letters from preparers, auditors, users, academics, individuals, and others-including 36 from higher education entities.

Many of the letters expressed a desire to maintain as much consistency as possible between not-for-profit and for-profit financial reporting. Commenters also expressed the need for a proposal that better takes into consideration the differences among NFPs without adding additional complexity to the NFP's financial statements. In summary, feedback to FASB included:

General support for the following:

  • Combining net assets into two classes: net assets without donor restrictions and net assets with donor restrictions.
  • Reflecting amounts by which endowment funds are underwater within net assets with donor restrictions and additional disclosures related to an NFP's policy on spending from underwater endowment funds.
  • An analysis of operating expenses by both their function and nature in a single location (generally in the notes).
  • Reporting investment income net of external and direct internal investment expenses.
  • Using the placed-in-service approach when reporting expirations of donor restrictions on gifts of cash or other assets to be used to acquire or construct long-lived assets, eliminating the "bleeding-in" recognition option.

General disagreement with the following:

  • Displaying two operating measures, one before governing board appropriations and one after.
  • Presentation of all internal transfers (i.e., governing board actions and appropriations) on the face of the statement of activities.
  • Separating the donor-restricted endowment spending (i.e., payout) from the quasi-endowment payout.
  • Reporting unrestricted gifts of long-lived assets when received or restricted gifts for long-lived assets when placed in service as operating revenue/support with a subsequent transfer from operating to non-operating activities.
  • Reporting interest expense, fees, and related expenses as non-operating activities.
  • Realigning line items presented in the statement of cash flows with the proposed operating classification for the statement of activities.

Feedback was mixed for the following:

  • Disclosures of information about liquidity, with more support for the qualitative disclosures than the quantitative disclosures.
  • A required intermediate measures of operations. Many agree with requiring an intermediate measure of operations, but disagree with what was proposed.
  • Requiring the direct method of presenting operating cash flows and whether to retain the requirement to present the indirect method.

Based on the feedback received through the comment letter process, FASB developed a subset of topics for further consideration at three public roundtables held on September 21 and October 6. These included:

  • Whether or not an operating metric should be required and, if so, what it should include. While roundtable participants generally agreed that an operating metric should be required, there was little support for the two measures included in the proposal. In fact, a number of participants encouraged FASB to reconsider defining an operating metric to be applied by all NFPs. These participants suggested that various sectors within the NFP industry be allowed to develop a meaningful metric over time.
  • Whether NFPs should be required to present operating cash flows using the direct method and, if so, whether the indirect reconciliation should continue to be required. As with feedback received in the comment letters, responses from roundtable participants was mixed. Nearly all participants agreed that the direct method was more understandable, but many were reluctant to require a presentation different than that of for-profit entities. In addition, a majority of the participants advised the Board that the cash flow statement-whether presented using the direct or indirect method-is not widely used by NFP boards and other users.
  • What and how to present information about an NFP's liquidity. FASB was interested in getting feedback on the whether the use of a classified balance sheet and separate presentation of assets whose use is limited would provide valuable information about an NFP's liquidity. There was not consensus among the participants as to whether these approaches would be helpful. In general, they felt that these would be helpful for medium to large NFPs, but not particularly helpful for smaller NFPs. Participants urged FASB to consider the difference between liquidity and availability, noting that donor restrictions and other claims on an NFP's net assets (i.e., availability) must be considered in conjunction with the nearness to cash of an NFP's assets and liabilities.
  • Whether the proposed changes to the presentation investment returns (i.e., showing them net of external and direct internal expenses) would provide more useful information to users. At two of the roundtables, the issue was raised about the proposed change in the language regarding which internal costs could be netted against investment returns. Specifically, changing the guidance from "related expenses" to "direct expenses" would result in most NFPs netting either more or fewer expenses against investment returns than they do today. 

A common theme at the public roundtables was the complexity of the proposed statement of activities. Participants felt that too much information was being added to a statement that is already challenging for those outside of the NFP sector to understand.

An interesting aspect of the roundtables was the lack of discussion around a number of the proposed changes. The Board did not seek additional feedback on some of the more controversial proposals including:

  • Reporting gifts of long-lived assets as operating activities.
  • Reporting interest expense as a non-operating activity.
  • Reclassifying certain line items within the statement of cash flows in order to more closely align it with the proposed changes to the statement of activities.

FASB has not discussed its reasons for excluding these topics from the roundtable discussions. It seems likely, though, that given the overwhelming negative feedback received, these proposals will not make their way into the final standard. The Board's intention with regard to these, and the other proposed changes, will become more evident as it begins the redeliberation process later this year.


Sue Menditto
Director, Accounting Policy