Significant Changes Ahead for Healthcare Non-Profit Organizations' Financial Reporting
The Financial Accounting Standards Board ("FASB") has been working on a financial statement project that may result in a number of changes to accounting standards and financial reporting for non-profit organizations ("NFP's"). The FASB issued an exposure draft for public comment on April 22, 2015, outlining the proposed changes, which remained open for comment through August 20. This article outlines some of the significant changes being considered for financial reporting by non-profit organizations, including healthcare entities.
Net Asset Classifications
Currently, NFP's are required to report net assets under three classifications: unrestricted, temporarily restricted and permanently restricted. As stakeholders and the FASB believe, there is some degree of confusion in what constitutes temporary restrictions versus permanent restrictions. The proposal would reduce the net asset classifications to just two -- those with donor-imposed restrictions and those without donor-imposed restrictions.
Intermediate Measure of Operations
On the statement of activities, the NFP would be required to present an intermediate measure of operations. The intermediate measure of net income from operations would be defined as those revenues and expenses that have a mission dimension or an availability dimension. A mission dimension is resources from or directed at carrying out the NFP's purpose. The availability dimension is those resources that are available for current period activities. For example, investing and financing activities and resources that have been restricted to future periods, either externally by a donor or internally by a board designation, would fall outside the mission or availability definitions and, therefore, would be transferred out of the intermediate measure of operations.
The exposure draft also includes several provisions specific to business-oriented healthcare entities. If enacted, the exposure draft would remover guidance:
- That required business-oriented healthcare entities to present a performance indicator and referred to guidance requiring that all not-for-profit entities report on operating excess before and after transfers (intermediate measure)
- For other related items that affect the presentation of performance indicators
- That required business-oriented health care entities to disclose their tax exempt status
- That prescribed expiration of restrictions when long-lived assets are placed in service, now that the requirement is no longer specific to healthcare entities
Currently, the underwater endowments are reported within the unrestricted net assets. Under the proposal, they would be reported in the new "donor-imposed restriction" net asset classification. In addition, required disclosures would include the board's policy on spending from underwater endowments, the level of the original gift, and donor stipulations or requirement by law (if any) of underwater endowments in the aggregate, and the fair value of underwater endowments in the aggregate
New quantitative and qualitative disclosures on liquidity would be required, including the time horizon the entity uses to manage its liquidity. For example, disclosures would include the total amount of financial assets, amounts unavailable to meet cash needs, liabilities due within the time horizon, and information on how the entity manages liquidity.
Statement of Cash Flows
The proposal would require the use of the direct method for reporting cash flows from operating activities and remove the requirement to reconcile the change in net assets to cash flows from operating activities. In addition, some cash flows would be changed from their current classifications. For example, using the required direct method, dividends and interest would be moved from operating to investing and cash paid for interest from operating to financing.
Other Presentation Matters
Healthcare entities, including not-for-profit, business-oriented healthcare entities, would classify assets and liabilities as current and noncurrent. However, a continuing care retirement community instead could sequence assets according to their nearness of conversion to cash and could sequence liabilities according to the nearness of the maturity and resulting use of cash.
Net assets without donor restrictions of not-for-profit, business-oriented healthcare entities would include assets whose use is contractually limited.
Cash and claims to cash that meet any of the following conditions would be reported separately and would be excluded from current assets:
- Restricted as to withdrawal or use for other than current operations
- Designated for expenditure in the acquisition or construction of noncurrent assets
- Required to be segregated for liquidation of long-term debts
- Limited to use for long-term purposes by a donor-imposed restriction
Other proposed changes include:
- Reporting separately within operations and before transfers the immediate write off of goodwill (when criteria for such treatment is met), accessions and deaccessions of collection items not capitalized that are acquired with resources not donor-restricted, and certain equity transfers.
- Presenting the aggregate of transfers out of operating activities separately from transfers into operating activities. This can be on the face of the statement of activities or through footnote disclosure.
- Enhanced disclosures on board designations, appropriations and transfers.
- Reporting of expenses by both function and nature would be required to be disclosed in one location.
- Reporting of such on the face of the statement of activities could be by function, by nature or both or within the notes.
- Clarifying and defining costs that are management and general in nature, as well as provide enhanced guidance on allocation of costs between program and support activities.
- Disclose the method used to allocate functional expenses.
- Ensure investment expenses are netted against investment return on the face of the statement of activities.
- Removal of the current requirements to disclose netted investment expenses and the disclosure of the components of investment return as a separate disclosure and within the endowment roll-forward.
The FASB's goal is to both provide some degree of simplification and to provide more useful information for stakeholders. While the proposed changes do not totally change the NFP financial reporting model, the proposed changes are significant. NPO financial executives and finance and audit committees may well want to begin understanding these proposals and discussing how they may affect their organization.
The FASB continues to deliberate on these issues, including consideration of comments received. The FASB currently hopes to have a final update to these NFP standards by the second quarter of 2016.