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Private Colleges Brace for FASB’s Proposed Accounting Standards
The Financial Accounting Standards Board (FASB) today released its long-awaited proposed accounting standards update for private higher education institutions and other nonprofits. The document includes numerous changes that will profoundly impact the way these entities present their financial statements. The exposure draft is open for public comment until August 20, 2015.
Today’s announcement 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 and some note disclosures.
What the new standard means to you
Preparers of financial statements are urged to be proactive in reviewing and understanding the proposed guidance. Included in the proposed standard are sample financial statements using the new reporting structure. You can use these examples, when appropriate, to identify the impact on your institution. By reviewing the proposed standards and utilizing the examples, you will have the opportunity to communicate any suggestions or negative impacts of the proposed standard to FASB.
If 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 governing bodies, to explain the impact of the new reporting structure.
Specific areas of interest
New net asset classifications
The three current net asset classifications would be collapsed into two. Unrestricted net assets would become net assets without donor restrictions; temporarily and permanently restricted net assets would collectively become net assets with donor restrictions.
Direct versus indirect cash flow reporting
Private higher education institutions will be required to follow the direct method when preparing the statement of cash flows, similar to the Government Accounting Standards Board (GASB) requirements for public schools. Presentation as operating, investing, and financing will also change for certain activities related to long-lived assets, borrowings, and interest and dividends on investments.
Additional reporting measures in the statement of activities
Private colleges and universities can expect to report two new subtotals in the statement of activities in the net assets without donor restrictions category. The first is a subtotal of operating revenues, support, and expenses (before “transfers” and excluding resources received with donor-imposed restrictions); the second is a subtotal after “transfers” resulting from board designations or other self-imposed limits.
FASB believes having the required operating measure will foster greater comparability across institutions, while still allowing flexibility to tell your financial story and better interrelate to your internal reporting. This provision has garnered attention for the reporting of transfers and raised questions about whether the change will actually reduce complexity for users of financial statements.
Underwater endowments are those permanent gifts having a current market value that is less than the historic or original gift amount. Under the new guidance, 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.
Enhanced note disclosures
Most private institutions do not currently report expenses by function, but that would change under the new standards. Colleges and universities would need to disclose their expenses as program services, management and general, or fundraising, either in the notes or on the statement of activities. They will also need to develop procedures to ensure consistency in financial reporting.
Donor-imposed restrictions previously presented on the face of the financial statements as temporarily and permanently restricted will now be disclosed in the notes. New notes are also being added to describe governing body restrictions on net assets and how the school manages liquidity.
Reporting investment returns
Schools will be required to report investment income after deducting external and direct internal investment expenses. This provision is not expected to have a significant impact on financial reporting since most colleges and universities already maintain these records. However, the National Association of College and University Business Officers (NACUBO), has expressed a need for clarification on which specific costs should be netted.
How we can help
CliftonLarsonAllen’s higher education 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.
|Submit Comments on FASB Topic 958 by August 20, 2015|
|Online||Use the form on the FASB website: Exposure Documents Open for Comment|
File Reference No. 2015-230
|Written||Technical Director, FASB
File Reference No. 2015-230
401 Merritt 7
P.O. Box 5116
Norwalk, CT 06856-5116