At its March 4 meeting, by a vote of 5 – 2, FASB decided to move ahead with issuance of an exposure draft (ED) on its longstanding Financial Statements of Not-for-Profit Entities project, which it has been deliberating since being established in October 2009. The ED is expected to be released in mid-April, with a public comment period lasting through July 31, 2015.
FASB did not propose either an effective date or an implementation schedule for the new standard; instead, it will evaluate respondents’ comments to help determine an appropriate date (or dates) during its redeliberation following the comment period. In its first major rewrite since 1993, FASB is proposing to “refresh” the standards governing how not-for-profit organizations report their financial information. The intent of the ED is to improve net asset classification requirements and information provided in financial statements and disclosures about liquidity, financial performance and cash flows. Following are some of the tentative decisions made by FASB that are to be incorporated into the upcoming ED. Certain additional issues identified by FASB are slated to be resolved in the drafting process.
1.Proposed Changes to Net Asset Classifications
The number of net asset classes will be reduced from the current three to two.
2. Proposed Changes to the Statement of Financial Position
The exposure draft is expected to provide additional information on how NFPs are to disclose how they manage liquidity. A classified Statement of Financial Position will not be required, as was earlier contemplated. Assets limited as to use will be distinguished on the face of the Statement of Financial Position, with disclosures of the types of limitations in the notes. Underwater endowments will be classified as “With donor restrictions” and require disclosures, in the aggregate, of fair value, original gift value and the NFP’s spending policy with regard to underwater endowments. Notes are to include information on external restrictions, including: Donor-imposed time or purpose restrictions, Designations by the Board of Directors or its designee and Contractual or other legal restrictions. The exposure draft is expected to provide additional information on how NFPs are to disclose how they manage liquidity.
Liquidity disclosures are to include time horizon, qualitative and quantitative considerations.
3. Proposed Changes to the Statement of Activities
All entities will be required to provide an overall operating measure based on two dimensions—Mission and Availability of Resources. This measure replaces the performance indicator in health care entities.
Mission (Business and Charitable Activity)
This is based on whether resources have been received from, or are directed at, carrying out an NFP’s purpose for existence. Note: Investing and financing activities generally would be excluded from the Overall Operating Measure, as would all equity transactions.
Availability of Resources (Current Period – Future Periods)
This is based on whether resources are available for current period activities, reflecting the limits imposed by:
External donors and Internal actions of the NFP’s governing board, i.e., board designations.
Excluded from the operating measure are the following:
- Any item of income or expense that is not mission-related,
- Investment return,
- Pension activity,
- Equity transactions with affiliates and
- Designations made/removed by Board, or its designee (these are reported as transfers in and out on separate lines after the operating subtotal and before the Overall Operating Measure).
The Operating Measure is key in FASB’s proposed approach to improving comparability among the financial statements of nonprofit entities. The operating measure will include a subtotal before transfers to and from operating activities.
The Operating Measure
(1) Operating subtotal before transfers includes all legally available amounts generated by/used in operations of the current period, including the effects of donor restrictions and their expiration/satisfaction.
(2) Transfers are internal decisions to designate otherwise available amounts as unavailable, or vice versa. Transfers are presented in a discrete section after the operating subtotal and before the Overall Operating Measure.
(3) This is the Overall Operating Measure.
Treatment of capital-like transactions in the Statement of Activities is summarized as follows:
The following items should be reported separately from revenues, expenses, gains and losses, and presented within the operating activity section of the Statement of Activities and before the section of governing board transfers:
- The immediate write-off of goodwill upon an acquisition of an entity (required of NFPs predominantly supported by contributions and investment income), unless the acquired entity is for a purpose or purposes that are not directed at carrying out the purpose for the acquirer’s existence,
- Accessions and deaccessions of noncapitalized collection items acquired with resources that are without donor restrictions and
- Equity transfers, unless they are not for current period use in carrying out the purpose for the reporting entity’s existence.
Net investment return (investment return less investment expenses) must be presented on the face of the Statement of Activities. Investment expenses must include both external and direct internal expenses, and there is no longer a requirement to disclose the gross investment income and expenses separately.
All NFPs must report operating expenses by both function and nature, either in a Statement of Functional Expenses, the Statement of Activities or in the Notes to the Financial Statements. The method(s) used to allocate costs among program and support services functions must be described.
4. Proposed Changes to the Statement of Cash Flows
In addition to requiring the direct method, FASB is proposing a reorganization within the Statement of Cash Flows to better match the revamped Statement of Activities presentation.Cash flows from operations must be presented using the direct method (the exposure document will ask if the indirect method should be required for certain NFPs).Certain cash flow items will be recategorized to better align “operating” activities with the Statement of Activities and the Overall Operating Measure, as described in the table below.Contributions restricted to endowment will continue to be reported as a financing activity.
5. Proposed Transition
The exposure draft will require retroactive application of the proposed changes. In the initial year of application, the annual financial statements would disclose the nature of any reclassifications or restatements and their effect, if any, on the change in the net asset classes for each year or period presented. Application to interim financial statements would not be required in the initial year of application.