Update on The Non-Profit Financial Reporting ModelJanuary 15, 2014
Marcus R. Harwood, CPA
As you may recall from prior newsletters, the Not-For-Profit Advisory Committee (NAC) of the Financial Accounting Standards Board (FASB) is re-evaluating the non-profit financial reporting model. Their focus is on improving net asset classification requirements and information provided in the financial statements and footnotes about liquidity, financial performance and cash flows.
The NAC’s goal is to issue an exposure draft of the proposed changes in 2014. The exposure draft would then be open for public comment before moving towards finalization. Implementation of the final standards is expected to be in 2017 or 2018. To date, the FASB has made several tentative decisions regarding changes that it believes will improve the quality of non-profit financial reporting. These changes would significantly change the current reporting model and will include the following:
The NAC has determined that users of non-profit financial statements would benefit from a defined intermediate operating measure. Revenues and expenses would be included or excluded from operations based on a mission dimension—whether resources are from or directed at carrying out an organization’s purpose for existence and an availability dimension—whether resources are available for current period activities reflecting both external limitations and internal actions of the governing board. The operating measure will include all legally available mission-related revenues before reductions for amounts designated by the governing board for use in future periods.
The NAC has tentatively decided to replace the existing net asset classification scheme–unrestricted, temporarily restricted or permanently restricted-based on donor stipulations, with a broader classification scheme to convey net assets with donor-imposed restrictions and without donor-imposed restrictions. Further information regarding the nature of the restrictions, including those placed by the NFP’s governing board, would be disclosed in the notes to the financial statements.
Statement of Cash Flows
The most significant modification being proposed to the Statement of Cash Flows is a requirement to use the direct method of cash flows rather than the currently prevalent indirect method. The NAC has also tentatively decided on certain other changes in classification of items between operating, financing and investing activities in order to more clearly align cash flow presentation with the fundamentals of the underlying transactions. For example, interest expense would be classified as a financing activity, and investment income would be classified as an investing activity.
As 2014 unfolds, more tentative decisions will be reached and we will keep you up-to-date as they occur.