Significant Changes Proposed for Not-for-Profit Reporting

FASB issued a proposed update that would significantly change the practice for not-for-profit financial statement preparers.  

The new standards would be the biggest changes for not-for-profit (NFP) reporting rules since FASB issued Statement No. 116 and Statement No. 117 in 1993. Since, FASB’s Not-for-Profit Advisory Committee and other stakeholders have supported improvements of the standards to provide better information to donors, creditors and other financial statement users.

FASB has sought to make NFPs more comparable through financial reporting, allowing donors and lenders to better assess the financial health of NFPs. Proposed amendments are intended to address complexities, inconsistencies and misunderstanding in existing reporting.

The proposal would change net asset classification requirements, and information presented about an NFP’s liquidity, financial performance and cash flows. The main provisions would require an NFP to do the following:

1. Replace the three existing net asset classes with just two net asset classes
2. Use the direct method of reporting cash flows for operating activities, as well as reclassify several cash flow items into different categories
3. Present two intermediate operating measures
4. Report expenses by both their nature and function
5. Provide quantitative and qualitative information that is useful in assessing liquidity
6. Provide net presentation of investment expenses against investment return on the face of the statement of activities
7. Use placed-in-service approach for the treatment of expiration of restrictions related to long-lived assets
8. Report the amount of endowment funds that are underwater within the proposed “with donor restrictions” class of net assets

You can find the full FASB proposed Accounting Standards Update (ASU), Not-for-Profit Entities (Topic 958) and Health Care Entities (Topic 954): Presentation of Financial Statements of Not-for-Profit Entities, here. Comments on the proposal can be made through August 20.

If you have any questions about the upcoming changes, please call Trent Foster, partner, higher education and not-for-profit services, at 972.448.6940.