In 2011, the Financial Accounting Standards Board (FASB) announced the addition of a project intended to improve financial reporting of not-for-profit (NFP) entities, in response to suggestions received from the FASB’s Not-for-Profit Advisory Committee. Since that time, the FASB has reexamined existing standards for financial statement presentation by NFP organizations with a focus on improving the current net asset classification scheme and information provided in financial statements and notes about an organization’s liquidity, financial performance, and cash flows. Several key aspects of the project are discussed below.
Existing guidance provides significant flexibility in the use of an operating measure; the only requirement is that the measure used must be clearly defined and disclosed in the financial statements (organizations also have the option of not presenting an operating measure). However, the original flexibility of this guidance has resulted in widespread disparity, making it very difficult to compare similar organizations. As a result, the FASB has tentatively decided to define an intermediate operating measure on the basis of two key dimensions: a mission dimension based on whether resources are from or directed at carrying out an NFP’s purpose for existence and an availability dimension based on whether resources are available for current period activities, and reflecting both external limitations and internal actions of an NFP’s governing board. Presentation of the intermediate measure of operations will be required of all NFP organizations.
Another aspect of this project addressed the need to maintain the existing net asset classification system, which characterizes assets as unrestricted, temporarily restricted, or permanently restricted. Based on research and feedback, the FASB has tentatively decided to replace the existing requirements of presenting totals for each of the three classes of net assets on the face of a statement of financial position and for changes in each of those classes on the face of a statement of activities with similar requirements for each of two classes of net assets that convey net assets with donor-imposed restrictions and without donor-imposed restrictions.To offset potential loss of information, the FASB has also decided to require disclosure of information about the amount and purposes of board designations of net assets without donor-imposed restrictions.
Statement of Cash Flows
To address concerns of stakeholders, the FASB has tentatively decided to improve the statement of cash flows by requiring the direct method for operating activities and removing the requirement to reconcile the change in net assets to net cash flows from operating activities (often referred to as the indirect method). The FASB has also discussed revising the cash flow categories to better align them with the tentative decision for an intermediate measure of operations.
Reporting of Expenses
The FASB has also tentatively decided to require NFP organizations to report expenses by their nature and retain the requirement to report expenses by their function. In conjunction with this, the FASB also decided to require NFP organizations to provide an analysis of all expenses by function and by nature in one location, in the statement of activities, a separate statement of expenses (currently called a statement of functional expenses), or a schedule in the notes. That analysis would include all expenses, both operating and non-operating, and would neither require nor preclude functionalization of non-operating expenses.
In upcoming meetings, the FASB is planning to address several additional issues, including improving NFP-specific note disclosures; classifying capital transactions and events, including restricted gifts to acquire or construct long-lived assets; and other specific implementation issues, such as presentation of equity transfers, noncontrolling interests in subsidiaries, and classification of changes in beneficial interests in trusts managed by others. An exposure draft of a proposed accounting standard that encompasses all of these decisions is expected by the end of 2014.