The Financial Accounting Standards Board (FASB) today released its long-awaited proposed accounting standards update for nonprofit organizations. 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 organization. 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 board of directors, to explain the impact of the new reporting structure.
Specific areas of interest
New net asset classifications
For organizations that receive contributions or grants with donor-imposed restrictions, 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
Nonprofits will now be required to follow the direct method when preparing the statement of cash flows. While some have elected to do this presentation in the past, it is uncommon. 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
Exempt organizations 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.
While these additional subtotals are not expected to significantly affect financial reporting, the provision has garnered attention surrounding the reporting of transfers and whether it will actually reduce complexity for financial statement users.
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
Existing standards require all organizations to report expenses by function (program services and supporting activities) on either the face of the statement of activities or in the notes. Expenses by natural expense classification (salary, occupancy, professional fees, depreciation) is currently allowed but not required. Under the proposed standard, organizations will now be required to disclose expenses by both function and natural classification. This can be accomplished through either a statement of functional expenses or disclosure in the notes.
As previously noted, donor restrictions will not distinguish between temporary and perpetual restrictions on the statement of financial position and statement of activities; however, the footnotes will continue to include enough information for the user to understand the timing and nature of the restrictions on net assets.
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 among some nonprofit organizations. This change will provide a more comparable measure of overall investment return among peers.
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.
|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