Presentation of Financial Statements of Not-for-Profit Entities – Where is the Project Going?

The Financial Accounting Standards Board (FASB) met on Friday, Dec. 11, 2015 to discuss certain topics of the proposed FASB Accounting Standards Update, Not-for-Profit Entities (Topic 958) and Health Care Entities (Topic 954): Presentation of Financial Statements of Not-for-Profit Entities (the proposed update). The discussion during this meeting covered topics that the FASB has segregated into Phase One of the project.

Phase One includes topics from the proposed update that the FASB believes:
  • Have considerable support from stakeholders (users, preparers, regulators and auditors),
  • Are not dependent on other projects, and
  • Are improvements that the FASB might finalize in the near term.
Phase Two of the proposed update includes topics that, based on comments received on the exposure draft, the FASB believes need additional research. It also includes topics that may require reconsideration of other proposed changes that are likely to require more time to resolve because they involve consideration of suggested alternatives that the FASB did not previously consider or are related to similar topics being addressed in other projects.

The current prediction is that FASB might complete deliberations and issue Phase One of the project by mid-summer with Phase Two at a later date.

Phase One of the proposed update includes the following:

1. Methods of presenting operating cash flows

2. The net-asset classification scheme and related issues, including:
  • Disclosure of board designated funds
  • Underwater endowments
  • Placed-in-service option for expirations of capital restrictions
3. Information useful in assessing liquidity

4. Operating measures: improving disclosures by those not-for-profit entities that choose to present such a measure

5. Expenses, including:
  • Expenses by nature and analysis of expenses by function and nature
  • Netting of external and direct internal expenses against investment return
  • Disclosure of netted investment expenses
  • Enhanced disclosures about cost allocations.
Phase Two of the proposed update consists of the following:

1. Operating measures: all other elements of the proposal, including:
  • Whether to require intermediate measure(s)
  • Whether and how to define such measure(s) and what items should or should not be included in the measure(s)
  • Alternative disaggregation approaches suggested by stakeholders

2. Statement of cash flows: realignment of certain line items

Topics discussed and decisions reached at the December 11th meeting of Phase One were as follows:

Methods of Presenting Operating Cash Flows

During the discussions, the FASB decided not to require not-for-profit entities (NFPs) to use the direct method of presenting operating cash flows, but instead to continue to allow them to use either the direct method or indirect method. Further, the FASB decided to no longer require the indirect reconciliation if an NFP chooses to use the direct method.

Net Asset Classification Scheme and Related Topics

The FASB made decisions on the following topics:

1. Requirement of two classes of net assets
  • The FASB affirmed its proposal to combine temporarily and permanently restricted net assets into “net assets with donor restrictions” and to rename unrestricted net assets “net assets without donor restrictions.” Consistent with the proposed update, this alternative would retain the current generally accepted accounting principles (GAAP) requirement to provide relevant information about the nature and amounts of donor restrictions on net assets (either on the face of the statement of financial position or in the notes).

2. Disclosure of amounts and purposes of board-designated net assets
  • The FASB affirmed its proposal to require the disclosure of the amounts and purposes of board-designated net assets either on the face of the financial statement or in the notes.
3. Classification and disclosure of underwater endowments
  • The FASB affirmed its proposal to require that the aggregate amount by which endowment funds are underwater be classified within net assets with donor restrictions rather than without donor restrictions)
  • The FASB decided to affirm its proposal for endowment funds that are underwater to require the disclosure of:
    • The NFP’s policy to either reduce expenditures or not spend from underwater endowment funds,
    • The aggregate fair value,
    • The aggregate original endowment gift amount or level required by donor stipulations or by law to be maintained, and;
  •      d.  The aggregate of the amount of the deficiencies.
4. Requirement of placed-in-service approach and elimination of over-time approach for expirations of restrictions to acquire or construct long-lived assets
  • The FASB affirmed its proposal to require, in the absence of explicit donor instructions, the placed-in-service approach for expirations of restrictions to acquire or construct long-lived assets, thus eliminating the over-time approach.

Information Useful in Assessing Liquidity

Additionally, FASB discussed the proposal for providing qualitative and quantitative information useful for assessing liquidity and potential alternatives. The FASB directed the staff to explore an approach that would require, like the proposed update, qualitative information about how the NFP manages its liquidity and liquidity risks, but provide alternative ways of presenting quantitative information. This approach would emphasize information about assets that are liquid and available at the date of the statement of financial position.