The Financial Accounting Standards Board embarked on a project in November 2011 to review the standards for financial reporting of not-for-profit entities and determine ways to promote best practices for other means of financial communications used by these entities.
The Financial Accounting Standards Board (FASB) held multiple educational sessions to discuss current reporting standards and to establish a project plan. With the plan in place, the presentation of financial information, disclosure of activities and clarification of other matters were discussed in a series of meetings.
As a result of these discussions, certain changes were proposed that could have a significant impact on the current presentation of not-for-profit financial statements. Below is an overview of the core changes expected to be released in a first draft of the proposed FASB update to not-for-profit reporting requirements.
Net Assets
Under the current guidance, not-for-profit entities are required to classify net assets into three classifications: unrestricted, temporarily restricted and permanently restricted net assets. In an effort to simplify the presentation, the proposed standards would have only two categories: without donor-imposed restrictions and with donor-imposed restrictions.
| Current Presentation |
Proposed Presentation |
| Unrestricted |
Without Donor-Imposed Restriction |
| Temporarily Restricted |
With Donor-Imposed Restriction |
| Permanently Restricted |
FASB would require disclosures that focus on describing differences in the nature of the net assets with an emphasis on both how and when the resources can be used. The intention of these changes is to provide the users of the financial statements with a clearer picture of the net assets of the organization.
Statement of Activities
Similar to the proposed changes to net assets, the statement of activities would also undergo major changes to implement an intermediate measure of operations, reporting of expenses and investment return.
Implementation of an Intermediate Measure of Operations
The presentation of an intermediate measure of operations would be based on two key dimensions: a mission dimension and an availability dimension. The implementation of these dimensions is intended to provide the users of the financial statements a clearer picture of a not-for-profit’s operations.
The mission dimension would be based on whether resources are (result) from, or are directed at, carrying out a not-for-profit’s purpose. The availability dimension would be based on whether the resources are available for current-period activities and reflect both external and internal limitations.
Reporting of Expenses
Voluntary health and welfare organizations have been required to present a separate statement of functional expenses. However, the proposed standards would incorporate this concept into the overall statement of activities and permit, but no longer require, it to be presented as a separate statement.
This change would apply to all not-for-profit entities and would require an analysis of expenses by function and nature in one central location. Furthermore, additional disclosures regarding the method of cost allocation would be required.
Investment Return
Presentation of investment returns would be simplified to show the investment revenue net of expenses. Additionally, the requirement to disclose the amount of netted investment expenses would be removed.
Statement of Cash Flows
Building on the changes to the statements of activities and presentation of net assets, use of the direct method of reporting cash flows provided or used by operating activities would be required. This change increases the focus on operating activities and removes the requirement to reconcile the change in net assets to net cash flow from operating activities using the indirect method.
In addition, the proposed changes would reclassify the presentation of certain cash inflows and outflows to better align the categories used in the cash flow statement with those proposed for the statement of activities.
Other Proposed Changes
Other changes proposed by the FASB relate to additional note disclosures regarding liquidity and underwater endowments that are not specifically tied to one of the core statements. FASB also plans to develop more steamlined examples of certain note disclosures.
The proposed changes described above are tentative and do not change the current presentation. The FASB is expected to issue an Exposure Draft of the changes in April 2015 with a comment period through July 2015. During the comment period, not-for-profit entities and their advisors can share their voice on the proposed changes and assist in shaping the future of not-for-profit reporting requirements.
For more details related to the changes described above and for the latest information, visit the Financial Statements of Not-for-Profit Entities Project Update website at www.fasb.org/jsp/FASB/FASBContent_C/
ProjectUpdatePage&cid=1176159286112. – John Waters, CPA.