FASB proposes improving not-for-profit financial statements

The Financial Accounting Standards Board (FASB) issued a proposed accounting standard update (ASU) to improve the standards for not-for-profit organizations’ (NFPs’) presentation of their financial statements.

The proposed guidance includes disclosure requirements for enhanced liquidity and is expected to reduce complexity while making the financial statements easier to compare and more useful. The following outlines the four key areas of improvement proposed.

Net asset classifications
NFPs would need to present only the two following classes of net assets (instead of the current three classes) on the face of the statement of financial position and in the statement of activities:

  • Net assets with donor restrictions
  • Net assets without donor restrictions
The proposed regulations require financial statements to include information about the nature and amount of the different types of donor-imposed restrictions, and similar information about governing board designations that create or remove self-imposed limits regarding the use of resources that aren’t restricted by donors. The NFP would also need to disclose information about the way it manages liquidity and the liquidity of assets and near-term demands for cash as of the reporting date.

In addition, underwater donor-restricted endowment funds (funds for which the current fair value is below either their original gift amount or an amount the donor or law requires the NFP to maintain) would be presented in the financial statement as net assets with donor restrictions.

Intermediate measures of operations in the statement of activities
NFPs would be required to present the following two operating activities subtotals for the change in net assets without donor restrictions:

  • Operating revenues, support, expenses, and gains and losses that are without donor-imposed restrictions and that occur before internal transfers
  • The effects of internal transfers as a result of governing board designations, appropriations or similar actions that affect self-imposed restrictions regarding resource use

Presentation of expenses
The amendments require NFPs to provide information on operating expenses by both their nature and function, either on the face of the statement of activities, as a separate statement or in the notes to the financial statements. In addition, NFPs would need to disclose the methodology used to determine the allocation of costs among functions.

They would also be required to present investment returns net of related external and direct internal expenses.

Statement of cash flows
NFPs would have to use the direct method of presenting operating cash flows within the statement of cash flows and would change certain cash flow classifications:

  • Cash flows resulting from purchases of long-lived assets, contributions received that are restricted to acquire long-lived assets and sales of long-lived assets would all be classified as operating cash flows rather than investing cash flows, as is the case under existing guidance.
  • Interest payments on borrowings and cash management activities would be classified as financing cash flows rather than operating cash flows.
  • Cash flows resulting from receipts of interest and dividends on loans and investments, other than those made for program purposes, would be classified as investing cash flows rather than operating cash flows.

The proposed amendments would be applied retrospectively. The guidance wouldn’t apply to interim financial statements issued within the initial year of application, but it would apply to interim information reported with annual financial statements. Transition disclosures would include the nature of any reclassifications or restatements, and their effect on changes in the net asset classes for each year presented.

The comment period ends Aug. 20. After it considers stakeholder feedback, FASB will determine the effective date of the proposed guidance.