The Financial Accounting Standards Board (FASB) plans to release a new proposed accounting standard for public comment in the second quarter of 2015. The standard will significantly change financial reporting for not-for-profit organizations, which has been guided by Statement of Financial Accounting Standards (SFAS) No. 116, Accounting for Contributions Received and Contributions Made, and SAFS No. 117, Financial Statements of Not-for-Profit Organizations. The updated standard is designed to broadly provide more transparent information about the liquidity of an organization, specifically its cash groups and access to funds.
Under the expected standard, four main changes will occur in not-for-profits’ financial statements:
- Use of two classifications of net assets: restricted and unrestricted, rather than three classifications of: unrestricted, temporarily-restricted, and permanently-restricted. The proposed model removes the hard line distinction between temporary and permanent restrictions and focuses instead on describing differences in the nature of donor restrictions. The intention is to focus on how and when net assets can be used.
- The inclusion of a presentation of a uniform operating measure in the statement of activities. This operating measure will be designed to reflect expenditures related to fulfilling the organization’s mission and available funds; it will also allow for a comparison between organizations. The proposed operating measure will include unrestricted gifts, most mission-related revenues, programmatic investing and financing activities, and releases of donor restrictions. It will exclude donor restricted gifts, most investing and financing activities, board designated gifts and revenues, and gifts of long-lived assets to be held and used (these assets will initially be included in operating revenue when received and will be transferred out of operations when placed in service).
- Use of the direct method for presentation for the Statement of Cash Flows, rather than the indirect method used by a majority of organizations. The direct method will add new information to most not-for-profit organizations’ cash flow statements, such as cash received from customers and cash paid to vendors and employees. The proposed standard also changes the classification of certain items within the cash flow statement. For example, payments to purchase, construct, or acquire long-lived assets for operating purposes move from investing activities to operating activities.
- A requirement that all not-for-profit organizations report expenses by both natural and functional classifications either on the Statement of Activities or within the footnotes. Natural expense categories include salaries, payroll taxes, professional fees, office supplies, etc. Currently all not-for-profit organizations are required to present expenses by functional classification, while only voluntary health and welfare organizations are required to report expenditures by both natural and functional classification. For organizations that do not currently aggregate information based on natural classification, this may represent a significant change in how expenditures are aggregated and analyzed.
Also expected to be included are increased disclosures related to immediate cash availability. Such disclosures would include:
- The total amount of financial assets;
- Amounts that, due to various limitations, are not available to meet cash needs within the not-for-profit organization’s disclosed time horizon used to manage liquidity;
- The total amount of financial liabilities that are due within the time horizon; and
- Qualitative information about how the organization manages its liquidity.
The new standard is also expected to include changes to how not-for-profit organizations report and disclose underwater endowments. The standard is expected to require that underwater endowments be reported within the donor restriction’s class of net assets. These amounts are currently reported as unrestricted. There would also be expanded disclosures about underwater endowments, including:
- The board’s policy or decision on whether to reduce or not spend from underwater endowment funds;
- The original gift amount of underwater endowment funds in the aggregate; and
- The fair value of underwater endowment funds in the aggregate.
As a result of this standard, not-for-profit organizations should expect to implement new processes for gathering information as well as recording the expenditures related to their missions, and recording contributions. Organizations may also desire to inform and educate donors and other users of the financial statements of the expected changes.
At this point, an effective date for adoption of the new standard for all not-for-profit organizations has not been determined; however, now is the time to begin considering how this new guidance will affect your organization and to begin thinking about any necessary changes to your processes and procedures to accumulate the information needed. Your Plante Moran advisor can help you evaluate the application of this guidance to your organization and answer any questions about how the proposed changes would impact your organization if adopted by the FASB.