FASB Exposure Draft on Not-for-Profit Financial Reporting IssuedApril 27, 2015
Reed W. Risteen, CPA
The long awaited exposure draft on non-profit financial reporting was issued on April 22, 2015. The exposure draft (ED), Not-for-Profit Entities and Healthcare Entities―Presentation of Financial Statements for Not-for-Profit Entities has a comment due date of August 20, 2015. No effective date has been proposed in the exposure draft. The ED states that the effective date will be considered after receiving feedback. Normally, wide reaching standards like this allow a couple of years for implementation. The 265 page document is available here.
Previous articles have broadly covered many of the topics discussed in this article. Now that the ED has been issued we can delve much deeper. An important point to note is that the ED does not change the measurement of financial statement elements, it just changes their financial statement presentation.
Statement of Financial Position
Please refer to the ED example statement of financial position in Exhibit A.
The statement of financial position is the financial statement least affected by the ED. The change here is that the current three classifications of net assets; unrestricted, temporarily restricted and permanently restricted, are replaced by two net asset classifications; without donor restrictions, and with donor restrictions. The notes to the financial statements would provide the detail concerning temporary and permanent restrictions.
Because the ED is proposing new disclosures about liquidity (see Notes to the financial statements), the current requirement for business-oriented healthcare entities to present a classified balance sheet has been removed.
Statement of Activities
Please refer to the ED example statement of activities in Exhibit B.
The statement of activities (SOA) would change significantly under the ED and there are several examples contained in the ED for different types of non-profit organizations.
The “without donor restrictions” column reports operating revenues and expenses, resulting in an operating measure before transfers, which is labeled “operating excess, before transfers” in the ED example. Operating revenues and expenses are those that are mission related and currently available. Operating revenues would include gifts of property and contributions restricted for property that has been placed in service. However, those amounts would be removed in the following transfers section. Transfers consist of board designations, appropriations and similar transfers into or out of operations. Adding or deducting these items results in “operating excess, after transfers”. “Nonoperating changes” without donor restrictions follows, and would consist of revenue and expenses not meeting the operating definition, such as investment gains, losses and income and interest expense. Following nonoperating items is the reversal of the board designations, appropriations and similar transfers into or out of operations items above. Also note that the above required operating measure would replace the current “performance measure” required of business-oriented healthcare entities.
The “with donor restrictions column” has no intermediate subtotals or operating measures. It reports donor restricted contributions, releases to “without donor restrictions”, investment return on restricted assets, and any nonoperating items and results in changes in net assets at the bottom.
Although the example described above fits on one page, there are other examples where the statement of activities is split into two pages. The first page of the statement concludes with the operating measure, and the second page continues with nonoperating items.
Reporting of Expenses
Please refer to the ED example statement of functional expenses in Exhibit C.
The ED requires that expenses be reported in a matrix format that contains expenses by object (such as rent, supplies) and by function (program, management and general). Typically expenses by object are reported in rows and functions in columns. This information can be presented in the statement of activities, in a separate financial statement, or in the notes to the financial statements. It is interesting to note that functional classification is not required for nonoperating expenses.
Currently, only voluntary health and welfare organizations (those organizations supporting primarily by contributions from the public) are required to include a statement of functional expenses in their financial statements, which is a matrix format that satisfies the ED requirement.
It would be unwieldy to present the matrix in the statement of activities itself, especially given the more complex format, and although it could be presented in a note to the financial statement, typically a landscape format is necessary to capture all the data. Therefore, most nonprofit organizations will probably satisfy this disclosure requirement by adding a statement of functional expenses like that included in Exhibit C. Under that scenario, expenses reported in the statement of activities would most likely be in total for each function as presented in Exhibit B.
The Statement of Cash Flows
Please refer to the ED example statement of functional expenses in Exhibit D.
The ED proposes significant changes for the cash flow statement. As we have reported previously, the ED requires use on the direct method, which was previously optional but rarely used. This means that, for cash flows from operating activities, instead of starting with the change in net assets, and converting the change to a cash basis by adding back noncash items and the change in accruals, the section would have items such as “‘received from donors”, “paid to vendors”, “paid to employees”, etc. as indicated in Exhibit D.
Inclusion of the reconciliation of the change in net assets to cash flows from operating activities is optional, but not required. As many organizations find this reconciliation helpful, they may choose to retain it in their statement of cash flows.
The ED also changes where certain items are reported. Purchases of property and equipment, contributions received to acquire property and equipment and proceeds from sale would be reported under operating activities (rather than investing activities), interest paid would be reported under financing activities (rather than operating activities), and investment income would be reported under investing activities (rather than operating activities).
Expiration of Restrictions Relating to Property- Under current rules, gifts of property or gifts of cash restricted to acquire property can be released from restriction in full when the property is placed in service, or released ratably over its useful life. The ED would eliminate the second option and require that the full release be recognized when the property is placed in service.
“Underwater” Endowment Funds- Rather than present the amount of underwater funds with unrestricted net assets, the ED calls for it to be classified as donor restricted net assets.
Investment Expenses- Investment expenses would be reported net of external and internal investment expenses. The change here is the netting of internal investment expenses, which would include the salary and benefits of internal investment managers.
Notes to the Financial Statements
The ED proposes additional disclosures in the following areas:
Functional Expenses – disclose the method used for allocating expenses by function. If the matrix of expenses by function and object is not reported in the financial statements, it would have to be provided in the notes to the financial statements.
Governing Board Designations, Appropriations and SimilarTransfers – disclose any addition or removal of self-imposed limits on the use of resources without donor restrictions. This disclosure would support the amounts reported in the transfers section of the statement of activities.
Assets with Donor Restrictions – disclose the composition of net assets with donor restrictions at the end of the period and how the restrictions affect the use of resources. Note that there are currently separate disclosures of the composition of temporarily restricted and permanently restricted net assets. The proposed disclosure merely represents a combining of these separate disclosures.
“Underwater” Endowment Funds – disclose the amount by which the historical dollar amount of endowment gifts exceeds the value of endowment assets. Also disclose the original gift amounts.
Liquidity – This is a new disclosure around short-term liquidity. The non-profit organization would define “near term” (30, 60 or 90 days) and disclose the organization’s financial assets, deduct those financial assets not available in the near term, and deduct liabilities that are due within that period, arriving at an excess or deficiency amount.
Investment Expenses – disclose internal investment management salaries and benefits netted with investment income.
The FASB has referred to this project as a “once in a generation” opportunity to improve non-profit financial reporting. Please consider providing feedback to the FASB.
Please contact Reed Risteen, email@example.com or 860.561.6848 with any additional questions.