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Posted on May 5, 2015

FASB Proposes Significant Changes to Not-For-Profit Financial Statement Presentation

by Jill A. Shaw, CPA, Partner

It has been over twenty years since the FASB (Financial Accounting Standards Board) issued the current financial statement reporting guidance in 1993 for not-for-profit entities. On April 22, 2015 the FASB issued an exposure draft of a proposed accounting standards update,Presentation of Financial Statements of Not-for-Profit Entities, for public comment.

The FASB’s Not-for-Profit Advisory Committee and other stakeholders indicated that existing standards for financial statements are sound but could be improved to provide better information to donors, creditors, and other users of financial statements. The proposed amendments are intended to address several issues about the current financial reporting for not-for-profits, including but not limited to:

  • Misunderstandings and confusion caused by the complexities about the use of the currently required three classes of net assets.Inconsistencies in reporting (or lack of reporting) of intermediate measures of operations in the statement of activities and statement of cash flows.
  • Inconsistencies in the type of information provided about expenses of the period – for example, some, but not all, not-for-profits provide information about operating expenses by both function and nature.
  • Misunderstandings about the utility of the statement of cash flows, particularly about the reporting of operating cash flows

What will change? The financial statements will take on a different look and certain disclosures would be enhanced. The major proposed changes to note are:

  • The current net asset classifications of unrestricted, temporarily restricted and permanently restricted would be slimmed down to two classes (assets with and without donor restrictions).
  • The statement of activities would present two additional subtotals of the operating activities that are associated with changes in net assets without donor restrictions. These subtotals would distinguish operating activities for the period from other activities on the basis of whether the resources were directed at carrying out the not-for-profit’s mission and available for current-period operating activities.
  • The statement of cash flows would require the direct method of reporting. In addition, certain cash flows would be classified differently under operating, financing or investing as a result of the proposed changes.
  • Enhanced disclosures would be required over expenses, including amounts for operating expenses by both their nature and function. That information could be provided on the face of the statement of activities, as a separate statement, or in the notes to financial statements.

Essentially all not-for-profit entities would be affected by the amendments in this proposed update. Stakeholders can comment on the proposed changes until August 20, 2015. After this date, the FASB staff will analyze comment letters, public roundtable discussions and all other information obtained through due process activities. The Board then reflects on the proposed provisions once again, carefully considering the stakeholder input received. When finished with deliberations, the Board will issue a final update describing the changes required, therefore it will be some time before any changes would take effect.

An opportunity for not-for-profit entities to learn more about the proposed changes is available on Tuesday, May 12, when the FASB hosts a free educational webinar, which will provide an in-depth look at the proposed update.You can sign up for the webinar here.


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