Update On Proposed Non-Profit Organization Financial Reporting StandardsDecember 05, 2014
Christine L. DiMenna, CPA
We continue to monitor the Financial Accounting Standards Board’s (the Board) project to-redesign the non-profit financial reporting model. The primary objectives are to improve the quality of financial reporting with an emphasis on improving the reporting of the nature of restrictions on an organization’s net assets, operating results and liquidity. In previous newsletters, we’ve addressed the tentative decisions made so far by the Board including replacing the current net asset classification format of unrestricted, temporarily restricted and permanently restricted with two broader classes: those with donor restrictions and those without donor restrictions. The statement of activities will also be re-designed and require an intermediate operating measure that includes activities both central to the organization’s mission and available for current activities reflecting both internal and external limitations. In addition, the statement of cash flows will be prepared using the direct rather than the indirect method which is currently prevalent.
The Board has continued to make decisions affecting the presentation and disclosures relating to each of those areas along with disclosures relating to liquidity. Some of the more significant recent decisions are as follows:
Net Asset Classes
With respect to net assets, organizations would be required to disclose information about the amount and purposes of board designations of net assets without donor-imposed restrictions.
Statement of Cash Flows
On the statement of activities, organizations would reclassify the following cash inflows and outflows to better align the categories used in the cash flow statement with those proposed for the statement of activities:
- Cash gifts with donor-imposed restrictions to be used to purchase, construct or otherwise acquire long-lived assets for operating purposes from financing to operating
- Cash payments to purchase, construct or otherwise acquire long-lived assets for operating purposes from investing to operating
- Cash proceeds from the sale of long-lived assets from investing to operating
- Cash dividends and interest income from operating to investing
- Cash payments of interest expense from operating to financing
Statement of Activities
On the statement of activities, organizations will present (1) all transfers in a separate, discrete section and (2) a subtotal of operating revenues and expenses before such transfers, which is in addition to the decision to require an intermediate measure of operations (which is an amount after such transfers). At a minimum, organizations will present the aggregate of transfers out of operating activities separate from the aggregate of transfers into operating activities. Unless the organization chooses to display all transfers as discrete line items on the face of the statement of activities, the organization would need to provide details for aggregated transfers in a note. All organizations would be required to qualitatively describe the purpose, amounts and types of transfers (for example, those done because of standing board policies as one-time decisions, or for other reasons). In addition, business-oriented healthcare providers would be permitted, but no longer required, to present the performance indicator that is currently required.
A non-profit organization would continue to be allowed to use a one or two-statement approach to present all of the revenues, expenses, gains, losses and other events that change net assets or classes of net assets for the period. A non-profit organization will be permitted but not required to report the intermediate measure of operations in a statement that also reports the change in unrestricted net assets for the period, as currently required. Accordingly, when using a two-statement approach, the first statement could end with the intermediate measure of operations.
Guidance for determining what to include in operating results based on the mission dimension would note that (1) all gifts result from carrying out the non-profit’s activities but are not necessarily available for current period activities, (2) all legally available mission-related revenues are to be presented before reductions for amounts designated by the governing board for use in future periods (rather than only the net of those amounts), (3) investing and financing activities, other than those directed at carrying out the non-profit’s programs, would not meet the mission dimension (and thus, fall outside of the intermediate measure of operations). Investing and financing activity directed at carrying out the non-profit’s programs, sometimes referred to as programmatic investing, would include items such as interest earned on an educational institution's student loans, a foundation's subsidized loans to support grantees and similar lending directed at achieving the non-profit’s purposes.
Guidance for determining what to include in operating results based on the availability dimension would note that (1) external limits often result from donor-imposed restrictions that limit the availability of donated resources for current period use until such restrictions are met, and (2) internal limits often result from actions of a non-profit’s governing board to designate resources for specific (limited) purposes or future periods and similar actions that effectively make resources unavailable for current operations. Unrestricted contributions, for example, would initially be reported as operating revenue. The organization would report a transfer out of current operations for any amount of the contribution that the governing board has designated to be invested in the quasi-endowment, thus making the contribution unavailable for current operations.
In addition, non-profits would be required to use the placed-in-service approach for the treatment of expiration of restrictions related to long-lived assets, thus eliminating the option to release the donor-imposed restriction over an asset's estimated useful life.
The Board has also reached tentative decisions regarding disclosures of items such as investment return, capital-like transactions and liquidity.
With respect to investment return, the Board would require a net presentation of investment expenses against investment return on the face of the statement of activities. In addition, the Board would require external and direct internal investment expenses to be netted against the investment return but would remove the requirement to disclose netted investment expenses. Finally, the Board would require the disclosure of the amount of internal salaries and benefits, if any, that have been netted against investment return.
With respect to capital-like transactions, a non-profit would initially report the gift of long-lived assets without donor restrictions as operating revenue. If the non-profit places the asset in service (instead of selling it), the non-profit would also report a transfer out of operations for the entire amount of the gifted long-lived asset. Similarly, gifts of cash that a donor has restricted for the acquisition or construction of long-lived assets would initially be reported as revenues that increase net assets with donor restrictions, which are reported outside of operations. When the asset is placed in service, the release of the donor restriction would be reported as an increase in net assets without donor restrictions within operating activity and a decrease in net assets with donor restrictions. Consistent with the treatment of gifts of long-lived assets placed in service, that amount would also be reported as a transfer from operating to non-operating activities.
- With respect to disclosures about liquidity, the Board would require a non-profit to provide quantitative and qualitative information useful in assessing liquidity, including a description of the time horizon it uses to manage its liquidity. Quantitative information would include the (1) total amount of financial assets, (2) amounts that, due to various limitations, are not available to meet cash needs within the non-profit’s time horizon, and (3) total amount of financial liabilities that are due within that time horizon. Qualitative information includes information about how an organization manages its liquidity.
The Board would require that the so-called underwater amounts be reported within the proposed with donor restrictions class of net assets (rather than unrestricted class of net assets as currently required).
A non-profit organization also would be required to disclose the following information:
- The non-profit board's policy or decision on whether to reduce or not spend from underwater endowment funds
- Original gift amount (or level required by donor stipulations or law) of underwater endowment funds in the aggregate
- Fair value of underwater endowment funds in the aggregate
All of these decisions are tentative. Once issued as an exposure draft, the Board will solicit feedback and may make additional changes prior to issuing a final accounting standard update. Currently, the Board is expected to issue the exposure draft during the first half of 2015. We will continue to monitor significant decisions made by the Board and communicate them in future newsletters and other presentations.
For more information, please contact Christine DiMenna at email@example.com or 860.570.6439.