FASB Proposes Major Changes to Not-for-Profit Reporting Rules

In its first major rewrite since 1993, the Financial Accounting Standards Board (FASB) is proposing to “refresh” accounting standards geared toward how not-for-profit organizations report their financial information.

On Wednesday, the FASB issued an Accounting Standards Update, Presentation of Financial Statements of Not-for-Profit Entities, which contains recommended enhancements to the current financial reporting model for not-for-profit organizations.

“We believe these changes will refresh the model in ways that will make not-for-profit financial statements even more useful to donors, lenders, and other users,” said FASB member Lawrence Smith.

Individuals and organizations have until Aug. 20 to review the exposure draft and provide written comments to the FASB about the proposed changes to not-for-profit accounting rules. Instructions on how to submit comments can be found in the Accounting Standards Update.

Under the proposal, the FASB has targeted improvements to current net asset classification requirements and information presented in financial statements about a not-for-profit’s liquidity, financial performance, and cash flows.

Among the proposed changes that not-for-profit financial statement preparers should be aware of include:

Net asset classification. The proposal would require not-for-profit organizations to present on the face of the statement of financial position the amount for each of two classes of net assets – net assets with donor restrictions and net assets without donor restrictions – as opposed to the three classifications currently under US Generally Accepted Accounting Principles (unrestricted, temporarily restricted, and permanently restricted).
Liquidity information. The proposal includes some specific requirements directed at improving a financial statement user’s ability to assess a not-for-profit organization’s liquidity and how it is being managed. Specifically, the proposal would require the disclosure of both quantitative and qualitative information about the liquidity of assets and near-term demands for cash as of the reporting date, including:

• The amount of financial assets at the end of each period.
• The amount that, because of restrictions or limitations on their use, is not available to meet the cash needs in the near term.
• The amount of financial liabilities that require cash in the near term.
• The way an organization manages its liquidity, including the time horizon it uses in the management of liquidity.

Statement of activities. The proposal would require presentation on the face of the statement of activities of the amount of the change in each of the two classes of net assets, rather than that of the currently required change for each of the three classes. A not-for-profit organization would continue to report the currently required amount of the change in total net assets for the period.
The Accounting Standards Update would also require presentation of two measures (subtotals) of operating activities associated with changes in net assets without donor restrictions. Those subtotals would reflect operating activities for the period, which would be distinguished from other activities on the basis of whether the resource inflows and outflows are from or directed at carrying out a not-for-profit organization’s purpose for existence and available for current-period operating activities.

• First subtotal: operating revenues, support, expenses, and gains and losses that are without donor-imposed restrictions and is before internal transfers.
• Second subtotal: effects of internal transfers resulting from governing board designations, appropriations, and similar actions that place (or remove) self-imposed limits on the use of resources that make them unavailable (or available) for current-period operating activities.

In addition, all not-for-profit organizations would be required to provide information about their operating expenses by both nature and function – on the face of the statement of activities, as a separate statement, or in the notes to the financial statements, supplemented with enhanced disclosures about the methods used to allocate costs among functions.

Presentation of operating cash flows. The proposal would require two fundamental changes to increase the understandability and usefulness of the statement of cash flows.

• Present cash flows provided by operating activities using the direct method of reporting, rather than the indirect (reconciliation) method.
• Classify cash flows in ways that are more consistent with classifications in the statement of activities.

The effective date for the proposed changes to not-for-profit accounting rules will be determined by the FASB after the comment period has ended.
The FASB first undertook this project in 2011 based on input provided by its Not-for-Profit Advisory Committee (NAC) and other stakeholders. NAC members said they believed that, while sound, existing standards for financial statements of not-for-profit organizations could be updated and improved to provide better information to donors, creditors, and others.