United States

FASB proposes accounting standards changes for not-for-profits

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On March 4, 2015, the Financial Accounting Standards Board (FASB) voted 5-2 in favor of releasing a proposal, in the form of an Exposure Draft (ED) that will significantly impact not-for-profit financial reporting. The Not-for-Profit Advisory Committee, established by the FASB in 2009, has worked closely with the FASB in developing the concepts and changes embodied in the ED. The FASB expects to issue the ED for public comment by mid-April. If approved, the ED would result in the first major changes to not-for-profit accounting and reporting in more than 20 years.

The goal of the ED is to enhance the usefulness of the financial statements of not-for-profit organizations. It will include changes to the current net asset classification categories and expand required information about an organization's liquidity, financial performance and cash flows. The ED proposes reducing the number of net asset classes presented from three to two. The new classifications would convey net assets with, and without, donor-imposed restrictions; with underwater endowments being included solely within the 'with donor restrictions' category.

Under the ED, all not-for-profits would be required to report expenses by both nature and function using a matrix format referred to as the Functional Expense Schedule. Currently, only voluntary health and welfare organizations are required to report expenses by both nature and function. Welfare organization is not defined by FASB, which leaves some organizations uncertain as to whether the nature and function requirement applies to them. The Functional Expense Schedule will be required to be included in the statement of activities, in a separate statement or in the notes to the financial statements, providing organizations with flexibility in presentation. The ED will also propose the use of an operating measure within the statement of activities to improve communications around mission fulfillment and availability of resources for current period activity. Additionally, the ED will propose several changes related to the categorization of items for statement of cash flow purposes. These include cash flows from the purchase or sale of property, or contributions for such assets, being classified as an operating activity; the payment of interest on debt being classified as a financing activity; and the receipt of interest and dividends being classified as an investing activity. The direct method of presenting cash flows would also be required.

FASB Chairman Russell Golden and Vice Chairman James Kroeker were the two dissenting votes and two of the five board members voting in favor of the proposal did so with reservations. The dissenting votes and reservations expressed stem from concerns that the ED creates additional reporting differences between not-for-profit organizations and for-profit businesses. While some reporting differences are justified due to the source of support and nature of activities of not-for-profits, the concern is that some of the changes in the ED address issues that transcend not-for-profit accounting and would be more appropriately addressed at a global level.

Once the ED is issued, the FASB is planning to engage in public outreach and discussions to solicit feedback. We would encourage your organization to participate in these public discussions, including responding to the ED, so that your concerns about, and support of, key elements of the ED are heard.

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