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FASB Moves Forward With Reporting Model Changes for Nonprofits
The Financial Accounting Standards Board (FASB) has announced plans to move forward on proposed accounting standards changes for nonprofit organizations. Based on feedback received from the nonprofit community, FASB plans to split the proposed changes that were included in its exposure draft into two phases. FASB discussed the first phase at a December meeting, affirming several changes that could result in a final standard in 2016.
This is the latest step in a process started more than three years ago when FASB set out to improve financial reporting in the nonprofit sector. The proposed changes will impact financial statements, including note disclosures.
Consider formal training for certain financial statement users, such as your board of directors, to explain the impact of the new reporting structure.
Reporting changes affirmed
New net asset classifications
For organizations that receive contributions or grants with donor-imposed restrictions, the three current net asset classifications will be collapsed into two. Unrestricted net assets will become net assets without donor restrictions; temporarily and permanently restricted net assets will collectively become net assets with donor restrictions. Footnote disclosures will include the differentiation between temporary and perpetual donor restrictions. In addition, disclosures relating to amounts and purpose of board-designated net assets will be required either on the statements or in the notes.
Direct versus indirect cash flow reporting
Nonprofits will be allowed to continue to choose between the direct and indirect method when preparing the statement of cash flows. However, if an entity chooses the direct method, it will no longer be required to also present the indirect reconciliation. All other proposed changes to the cash flow statement will be included in future phases of the project.
Underwater endowments are those permanent gifts having a current market value that is less than the historic or original gift amount. The board affirmed its proposal that underwater endowments will be classified in net assets with donor restrictions instead of the current classification in unrestricted net assets. Expanded notes will also be required to disclose amounts underwater and to present plans for reducing or not spending from these funds.
Items not yet affirmed, but may be in future phases
The exposure draft proposed new disclosures meant to help the reviewer better understand the organization’s management of liquidity and the financial assets available to meet its near-term demands for cash. FASB will continue to discuss qualitative disclosure requirements surrounding how organizations manage liquidity risk, but may include a quantitative disclosure requirement as well.
Reporting of functional expenses
Existing standards require all organizations to report expenses by function (program services and supporting activities) on either the statement of activities or in the notes. Costs by natural expense classification (salary, occupancy, professional fees, and depreciation) are currently allowed but not required. Under the proposed standard, all organizations would disclose expenses by both function and natural classification. This can be accomplished through either a statement of functional expenses or disclosure in the notes.
Reporting investment returns
Organizations will be required to report investment income after deducting external and direct internal investment expenses. Given the varying size and complexity of investment portfolios, this information has been inconsistently tracked by some nonprofit organizations. This change would provide a more comparable measure of overall investment return among peers. Future discussions would include the types of expenses that should be deducted.
Additional reporting measures in the statement of activities
An intermediate operating measure is currently optional. The proposed standard would have required organizations to report a defined operating measure based on mission and availability. Based on feedback received, the FASB is continuing to discuss whether this should be required. However, it is anticipated that if an organization elects to show an intermediate measure of operations, disclosures surrounding what is included and excluded would be enhanced.
FASB is urging preparers of financial statements to review and understand the proposed guidance. The standards board is expected to continue discussing additional proposed changes in early 2016, and will continue to post updates to the standard on its website.
Once the standard is approved, early communication to the users of your financial statements is also a key to successful implementation. Consider formal training for certain financial statement users, such as your board of directors, to explain the impact of the new reporting structure.
How we can help
CliftonLarsonAllen’s nonprofit professionals will continue to follow these developments and provide additional guidance as it becomes available. We can help you understand how these reporting changes will impact your organization.