The Financial Accounting Standards Board (FASB) has developed guidance that it believes will improve the information provided in financial statements and disclosures for non-for-profit entities. The proposed guidance is Accounting Standards Update 2015-230 Presentation of Financial Statements of Not-for-Profit Entities and Health Care Entities. The proposed changes could have a major impact on the following reporting areas:
- Net Asset Classification
- The net asset classifications (permanently restricted, temporarily restricted, and unrestricted) would be replaced with only two net assets classes (net assets with donor restrictions and net assets without donor restrictions).
- Statement of Activities
- Expenses would be required to be reported by both their nature and function either on the face of the statement of activities or disclosed in the footnotes. Investment expenses would be netted with investment income to allow users to identify the net profit from the entity’s portfolio.
- Cash Flows
- The direct method of reporting cash flows for operating activities would be required in addition to changing the classification of certain cash flows.
- Liquidity
- Required disclosures of quantitative and qualitative information on liquidity of assets including the amount of financial assets at the end of each period, limited or restricted for use assets, and how the organization manages its liquidity.
The changes in these areas will provide donors and the public with more information about the organizations and how they spend and invest donor money. However, there are concerns are that the cost and results of implementation will outweigh the benefits of the changes. Some criticisms the proposal has received are that the changes will create too much of a divide between not-for-profit and for-profit accounting and therefore, will make it difficult for the end users of financial statements, and will create more reconciliation differences between IRS Form 990 and the financial statements.
Comments were due to FASB by August 20, 2015. FASB will hold a roundtable on September 21, 2015 to further discuss these changes.
For further information, read the Exposure Draft or FASB In Focus.