Last week, the Financial Accounting Standards Board (FASB), the body authorized to promulgate generally accepted accounting principles (GAAP) in the U.S., issued an Exposure Draft that, if adopted, would make significant changes to GAAP reporting in financial statements for nonprofit organizations. A copy of the Exposure Draft is available here.
The FASB’s stated objective for the proposed changes is “to improve the current net asset classification requirements and the information presented in financial statements and notes about a not-for-profit entity’s liquidity, financial performance, and cash flows.”
The changes proposed by the Exposure Draft would apply to all nonprofit organizations that issue financial statements prepared in conformity with GAAP.
Key proposed changes
Significant proposed changes in the Exposure Draft include the following:
- A requirement that nonprofit organizations present on the face of the statement of financial position amounts for two classes of net assets at the end of the period, rather than for the currently required three classes. Specifically, nonprofits would report net assets with donor restrictions and net assets without donor restrictions, as well as total net assets. The Exposure Draft would eliminate reporting on the face of the financial statements the distinction between temporarily restricted net assets and permanently restricted net assets.
- A requirement that nonprofit organizations present on the face of the statement of activities the amount of the change in each of the two classes of net assets (noted in the previous item) rather than that of the currently required three classes. Reporting of the change in total net assets for the period would continue to be required.
- A requirement that nonprofit organizations distinguish on the face of the statement of activities the income, expenses, gains, losses, and transfers related to operating activities from those related to other activities.
- The statement of activities would be required to present an operating measure to reflect the organization’s operating excess (deficit) before and after transfers.
- For this purpose, an operating excess/deficit “results from aggregating (a) revenues, expenses, gains, and losses of the period that are from or directed at carrying out [a nonprofit’s] purpose for existence and are available for use in the current period and (b) donor-restricted support that became available in the period for carrying out the [organization’s] purpose for existence.”
- For this purpose, transfers are “the effects of internal actions resulting from governing board designations, appropriations, and similar transfers that make resources unavailable or available for carrying out an [organization’s] current-period purposes.”
- A requirement that the “direct method” be used in reporting cash flows from operating activities in preparing the statement of cash flows. The requirement to report cash flows from operating activities using the indirect method would be eliminated.
- Changes in the categories in which certain cash flows are reported in the statement of cash flows. Specifically,
- Purchases, sales, and contributions restricted for the purchase of long-lived assets would be reported as operating cash flows (no longer as investing cash flows);
- Interest expense payments would be reported as financing cash flows (no longer as operating cash flows); and
- Interest and dividend income received from investments other than program-related investments would be reported as investing cash flows (no longer as operating cash flows).
- Elimination of the requirement that voluntary health and welfare organizations provide a statement of functional expenses.
- Requirements for enhanced disclosures in the areas of:
- Board-designated funds and net assets;
- Composition of donor-restricted net assets;
- Liquidity management;
- Expenses by both nature and function, either in the face of the financial statements or in the notes;
- Methods used to allocate costs; and
- Underwater endowment funds.
- A requirement to report investment income net of investment expenses.
Opportunity to comment
The FASB is accepting comments on the proposed changes through August 20, 2015.
More to come
We will be providing our clients with more specific information about the proposed changes included in the Exposure Draft at our Annual National Nonprofit Conference on August 28.