August 10, 2015
Significant Changes Ahead for Non-Profit Organizations' Financial Reporting
By Eric Saunders - Director, Assurance Services
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 will remain open for comment through August 20, 2015. This article outlines some of the significant changes being considered for financial reporting by non-profit organizations.
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 temporarily restrictions versus permanent restrictions, the proposal would reduce the net asset classifications to just two classifications, 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. Basically 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.
Underwater endowments - currently the amount of any 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.
Liquidity - 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 classification. 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 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.
- Must present 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.
- The reporting of expenses by both function and nature would be required to be disclosed in one location. The reporting of such on the face of the statement of activities could be by function, by nature or both or within the notes.
- The proposal will further clarify and define costs that are management and general in nature as well as provide enhanced guidance on allocation of costs between program and support activities.
- Entities will be required to disclose the method used to allocate functional expenses.
- Investment expenses will be required to be netted against investment return on the face of the statement of activities.
- Remove 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.
After the public comment period ends in August, the FASB plans on additional deliberation on these issues, including consideration comments received. The FASB currently hopes to have a final update to these NFP standards by the second quarter of 2016.