On April 22nd, the Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update (ASU) which could have a significant impact financial reporting of not-for-profit and health care entities. The Proposed ASU came to fruition as a result of the FASB’s Not-for-Profit Advisory Committee (NAC) and other stakeholders requesting improvements to existing standards in order to provide easier to understand information for financial statement users such as donors and creditors. The proposed ASU focuses on improving the current net asset classification requirements and information presented in financial statements and notes.
Net Asset Classifications
Net assets are currently required to be reported in one of three categories on the statement of financial position based on the absence or presence of donor-imposed restrictions and the nature of those restrictions: unrestricted, temporarily restricted, and permanently restricted. Proposed standards would require the use of two classifications of net assets – net assets with donor restrictions and net assets without donor restrictions paired with enhanced footnote disclosures.
Current standards allow for inconsistencies in reporting results of operations among not-for-profit entities. These inconsistencies hamper comparability and do not provide financial statement users a true measure of an entity’s liquidity. The proposed standards would enhance footnote disclosures regarding immediate cash requirements, limitations on the utilization of reported assets, and the way in which an organization manages its liquidity.
Statement of Activities
Proposed standards would eliminate the need for activities to be reported based on the three net asset categories and instead require the presentation of the change in the two classes of net assets noted above. Additional information would be provided to financial statement users via two subtotals in the statement of activities – one indicating operating revenues, support, expenses etc. that are without donor-imposed restrictions, the other including the effect of internal transfers resulting from governing board designations, appropriations, transfers, etc. In addition, proposed standards would require all not-for-profit entities to report expenses by both their natural and functional classifications.
Proposed standards eliminate the requirement for cash flows to be reported via the indirect method and would encourage the direct method. In addition, proposed standards would change where certain transactions are classified within the statement of cash flows (transactions involving long-lived assets, interest on borrowings, receipt of interest and dividends, etc.).
For additional information on the proposed standards and highlights of key proposed changes, see the April 22, 2015 FASB in Focus fact sheet at www.fasb.org. Comments on the proposal can be made through August 20, 2015 on FASB’s website.
Please contact your MarksNelson professional at 816-743-7700.