FASB Progresses Toward Issuance of Exposure Draft to Redesign the Non-Profit Financial Reporting ModelJuly 11, 2014
Marcus Harwood, CPA
As we have discussed in previous newsletters, the Financial Accounting Standards Board (FASB) is working on a project to redesign the nonprofit financial reporting model in order to provide more useful, transparent and consistent information to financial statement users. The primary areas likely to be impacted by the changes include net asset classification, indicators of financial performance, expense reporting, the statement of cash flows and information about liquidity and required disclosures.
Since our last newsletter, the FASB has made some additional tentative decisions likely to be included in the forthcoming exposure draft. As previously discussed, the current net asset classification scheme of unrestricted, temporarily restricted and permanently restricted is considered to be potentially misleading and inconsistent with the current legal framework, particularly since the introduction of the Uniform Management of Institutional Funds Act (UPMIFA). In the future, non-profit organizations are likely to present their net assets in two broader categories, those with donor restrictions and those without donor restrictions. Additional information regarding the nature of the restrictions will also be required. In a recent decision, organizations will be required to disclose the amount and purpose of board designations of assets without donor restrictions.
The FASB expects that the new financial reporting model will add more meaningful information regarding financial performance. The current discussion amongst the standard setters is how to identify those items that should be included and excluded from the operating measure. Ultimately, factors such as recurring vs. non-recurring items, large or unusual items and items deemed to be beyond management’s control have been rejected as determinants of operating vs. non-operating. It appears the distinction will be based on whether the activities are central to the charitable mission of the organization or ancillary. Activities such as investing and financing would be considered to be non-operating. In addition, activities that impact resources that are not available for current period activities, whether based on external restrictions or internal designations, would be considered to be non-operating. Organizations will have the option of presenting operating and non-operating activities on two separate statements or combining them on a single statement. Non-operating inflows will be shown “below the line”, and any appropriations to support operations will be shown as transfers into operations. The existing requirement that if an operating measure is presented, the change in unrestricted net assets must also be presented, will be eliminated.
The statement of cash flows proposal is that it will be prepared following the direct method—presenting cash inflows and outflows rather than the prevalent indirect method whereby the change in net assets is reconciled to explain the increase or decrease in cash. The FASB will inquire in the exposure draft whether the indirect method, in addition to the direct method, should be required for certain non-profits. In addition, certain items will be reclassified including interest expense which will be moved from operating activated to financing, interest and dividends which will be moved from operating to investing, purchases of property plant and equipment which will be moved from investing to operating, and contributions restricted for property and equipment which will move from financing to operating activities.
The new standard will likely require disclosure of operating expenses by function (program, management and general, and fundraising) and natural classification (salaries, rent, etc.) in a matrix format, either in a statement of functional expenses or in the notes. Non-operating expenses may be functionalized as well, although that will likely not be required. The FASB is also still trying to determine the appropriate level of disclosure of investment expenses and is likely to seek feedback from stakeholders as part of the exposure draft process.
Deliberations regarding presentation and disclosure issues to enhance information regarding an organization’s liquidity are ongoing and likely to evolve as the draft is exposed for public comment. Issues being considered include whether to require a classified balance sheet, separately present assets whose use is limited or provide additional footnote disclosures. The FASB has decided to require that organizations define the time horizon that they use to manage liquidity and to disclose the total amount of financial assets, and amounts that are not available to meet cash needs within the time horizon due to legal, donor-imposed or board-designated limitations. Organizations will also be required to disclose qualitative information about how they manage liquidity, including use of lines of credit, policies for establishing liquidity reserves and their basis for determining the time horizon used for managing liquidity.
The FASB is also considering combining endowment, investment and fair value disclosures in order to condense the footnotes, streamlining accounting policy disclosures and adding disclosures related to cost allocation methodologies and policies regarding spending of underwater endowment funds.
All of the decisions discussed above are tentative and subject to change either prior to or as a result of the public comment period. The FASB’s current project plan calls for issuance of the exposure draft during the second half of 2014, allowing a public comment period into the beginning of 2015 with issuance of a final Accounting Standards Update during 2015. Based on the implementation period used for several recent FASB pronouncements, implementation of this standard could be required by 2018 or 2019.
Marcus Harwood, CPA, is a partner at BlumShapiro is the largest regional accounting, tax and business consulting firm based in New England, with offices in Connecticut, Massachusetts and Rhode Island. The firm, with nearly 400 professionals and staff, offers a diversity of services which includes auditing, accounting, tax and business advisory services. In addition, BlumShapiro provides a variety of specialized consulting services such as succession and estate planning, business technology services, employee benefit plan audits, litigation support and valuation and financial staffing. The firm serves a wide range of privately held companies, government and non-profit organizations and provides non-audit services for publicly traded companies.