July 2015: Catherine M. Pennington, MBA, CPA, CGMA; Renner and Company, CPA, P.C.
It’s been over twenty years since we were introduced to temporarily and permanently restricted net assets. We’ve also gotten used to columnar formats on our statements of activities and a certain amount of freedom in determining the definition of “results from operations.”
I hope you aren’t too attached to these items because it may all change. The Financial Accounting Standards Board, FASB, has spent the past two years working on a variety of changes to nonprofit accounting and reporting. Their central mission was to improve the current net asset reporting requirements, address inconsistencies in establishing and reporting intermediate measures of operations, address inconsistencies in information reported about expenses, and clarify misunderstandings about the statement of cash flows, particularly operating cash flows.
The current status of the FASB project is an Exposure Draft, Not-For-Profit Entities (Topic 958) issued April 22, 2015 with comments due August 20, 2015. The implementation for these proposed changes is not scheduled for several years; however, the FASB wants practitioners and not-for-profit entities to spend that time working on the implementation of these changes.
Let’s take a look at what is proposed in the Exposure Draft.
Change #1 – Results from Operations
The Exposure Draft requires two intermediate measures (subtotals) of operations to be presented on the face of the statement of activities associated with changes in net assets without donor restrictions (we’ll talk about those next). These two measures are aimed at current operations from carrying out the entity’s mission. The difference between the two measures is that the second includes a new concept, internal transfers, from board designations, appropriations or other self-imposed limits on assets.
Change #2 – Dropping to Two Types of Net Assets
Classes of net assets will be reduced to two: those with donor restrictions and those without. We’ll no longer have to distinguish between temporary and permanent restrictions. Changes in net assets will be reported for these two classes of net assets as well as a total.
Change #3 – Indirect Method is No Longer an Option
Not-for-profit organizations will be required to present the statement of cash flows on the direct method of reporting.
Change #4 – Changes in Operating vs. Investing Cash Flows
Certain cash flows will be classified differently than they are currently classified. For example, cash flows from interest and dividends on investments are currently classified as operating cash flows but under the new guidance interest and dividends (other than from programmatic loans) will be classified as cash flows from investing.
Change #5 – More Information on Unrestricted, Designated Net Assets
The new proposed new standard requires additional disclosures on governing board designations, appropriations and similar transfers including imposition and removal of restrictions. These disclosures would include a description of the purpose, amounts, types of transfers, and qualitative and quantitative information about end-of-period balances of board designations of assets without donor restrictions.
Change #6 – New Disclosures on Liquidity
Additional disclosures will be required regarding the management of liquidity and quantitative as of the reporting date about financial assets available to meet near-term demands for cash including demands resulting from near-term financial liabilities.
Change #7 – A Statement of Functional Expenses Won’t be Required But…
Disclosure will also be required of the methods used to allocate costs among program and support function.
Change #8 – Investment Income and Expense Will be Shown Net
Investment income will be reported net of external and indirect internal investment expenses.
Change #9 – No More Allocation of Net Asset Releases Over Time
Not-for-profit organizations will be required to use the placed-in-service approach for reporting expirations of restrictions on gifts or cash or other assets used to acquire or construct a long-lived asset.
The comment period for this Exposure Draft expires August 20, 2015. If you are interested in these changes and how they will affect your organization or your clients, I recommend reading the actual document and considering a response to the Draft. The final Standard may differ from this Exposure Draft but we will learn more about it in the coming months.