Update on FASB Not-for-Profit Financial Statements Standards-Setting Project

Project Objective

To reexamine existing standards for financial statement presentation by not-for-profit entities (NFPs), focusing on improving:

  1. Net asset classification requirements.
  2. Information provided in financial statements and notes about liquidity, financial performance, and cash flows.

 An April 2012 podcast outlines the objectives of this project.

 Decisions Reached at December 18, 2013 Meeting

  1. Improve the reporting of expenses by requiring NFPs to report expenses by natural classification.
  2. Retain the current requirement to report expenses by function.
  3. Retain flexibility that allows NPFs to present expenses on the face of the Statement of Activities by either function or nature, with the alternative to present such information in the notes to the financial statements, or by both classifications (for example, nature within functions).
  4. Do not to require a matrix format for the presentation of the information; instead, provide flexibility for NFPs to provide the information as they determine appropriate. Alternatives would include expanding the Statement of Activities to include both natural and functional expense information, presentation of a separate Statement of Functions Expenses, or inclusion of such information in the notes to the financial statements. While the use of a matrix to present the information likely will be the most common approach chosen by NPFs, other methods, including narrative discussion, may be used.
  5. Further discussion is needed to address the intersection of the presentation of expenses by function and the Board’s previous decision to require an intermediate operating measure in the Statement of Activities. The Board decided to require that all expenses be included in whatever form chosen by the NFP to present its expenses, but left in flexibility to functionalize certain nonoperating expenses while not functionalizing other nonoperating expenses. An illustrative matrix was presented that included a separate column for nonallocated nonoperating expenses. Certain expenses, which may include interest and investment management costs, are sometimes considered to be “institutional” in nature, and therefore are appropriately not allocated among program or supporting services categories. In other circumstances, those same expenses, and others, may be considered to be so closely associated with specific program or supporting services activities that allocation among categories is appropriate. When certain nonoperating expenses are allocated, and others are not, the total of the proposed nonoperating expenses column would not articulate to the total of nonoperating expenses in the Statement of Activities. FASB staff will continue to study that oddity.
  6. The Board decided not to exempt any NFPs from the requirement to report expenses by both natural and functional classification.

Decisions Reached at October 23, 2013 Meeting

  1. Improve the Statement of Cash Flows by requiring the direct method of reporting cash flows provided (used) by operating activities and removing the requirement to reconcile the change in net assets to net cash flows from operating activities.
  2. Revise cash flow categories to better align them with the Board’s tentative decision to require an intermediate operating measure in the Statement of Activities:
    1. Cash gifts with donor-imposed restrictions to purchase, construct or otherwise acquire long-lived assets for operating purposes would be classified as inflows from operating activities rather than as inflows from financing activities.
    2. Cash payments to purchase, construct, or otherwise acquire long-lived assets for operating purposes would be classified as outflows from operating activities rather than as outflows from investing activities.
    3. Cash dividends and interest income would be classified as inflows from investing activities rather than as inflows from operating activities.
    4. Cash payments of interest expense would be classified as outflows from financing activities rather than as outflows from operating activities.

Decisions Reached at September 4, 2013 Meeting

  1. Change existing requirements of ASC 958-210-45-1 and 958-225-45-1 as follows:
    1. Delete the three existing classes of net assets presented in the Statement of Financial Position and the Statement of Activities, and
    2. Replace them with two classes of net assets that convey net assets with donor-imposed restrictions and without donor-imposed restrictions.
    3. Make conforming changes to the terminology and definitions of the net asset classes (presumably, NFPs would present additional information regarding the nature of the restrictions and liquidity in the notes to the financial statements).
  2. Retain the current requirement to provide information about the nature and amounts of different types of donor-imposed restrictions, but:
    1. Remove the hard-line distinction between temporary restrictions and permanent restrictions, and
    2. Focus instead on describing differences in the nature with an emphasis on both how and when the resources (net assets) can be used.
  3. Require disclosure of information about the amount and purposes of board designations of net assets without donor-imposed restrictions (and presumably, releases of those board designations).

Decisions Reached at May 29, 2013 Meeting

  1. Tentative decision to define an intermediate operating measure on the basis of two key dimensions:
    1. Mission—based on whether resources are from or directed at carrying out a NFP’s purpose for existence.
    2. Availability—based on whether resources are available for current period activities, and reflecting both external limitations and internal actions of a NFP’s governing board.
  2. The intermediate operating measure would include all legally available mission-related revenues before any reductions for amounts designated by the governing board for use in future periods. It would also include previously unavailable resources made available by the governing board for use in the current period, i.e., amounts released from previous board designations.

Next Steps

Staff is currently focusing on three areas for the Board’s consideration:

  1. Continuing its research on ways to improve information about liquidity.
  2. Clarifying and improving the current guidance on the statement of functional expenses.
  3. Developing alternative financial statement formats, particularly for reporting operating revenues, expenses and other changes in net assets.

For the project timeline, refer to the technical plan.

An exposure document is expected in the first half of 2014.

Board/Other Public Meeting Dates

Board meeting minutes are available by clicking on the links below. Note that conclusions reported are tentative and may be changed at future Board meetings. Decisions become final only after a formal written ballot to issue a final standard.

December   18, 2013 Board   Meeting—The Statement of Functional Expenses
December   11, 2013 Education   Session—The Statement of Functional Expenses
October   23, 2013 Board Meeting—The Statement of Cash Flows
October   2, 2013 Education   Session—Liquidity and The Statement of Cash Flows
September   4, 2013 Board Meeting—Net Asset Classes:   Classification and Disclosure Requirements
May   29, 2013 Education Session—Net Asset   Classes: Background, Stakeholder     Concerns,   Plans for Revisiting the Net Asset Classes
May   29, 2013 Board Meeting—Operating Measure: Definition   and Presentation
May   15, 2013 Education   Session—Operating Measure: Definition (cont.)
March   28, 2013 Education   Session—Operating Measure: Definition (cont.)
January   31, 2013 Education Session—Operating   Measure: Background, Objectives, Definition
June   6, 2012 Board MeetingProject Plan
May   16, 2012 Education   Session—Handout
November   9, 2011 Board Meeting—Agenda Announcement

Background Information

On November 9, 2011, FASB announced the addition of two agenda projects:

  1. Not-for-Profit Financial Reporting: Financial Statements, a standards-setting project
  2. Not-for-Profit Financial Reporting: Other Financial Communications, a research project

The projects are intended to improve financial reporting of not-for-profit entities, and are to encompass suggestions received by the Board from the Not-for-Profit Advisory Committee (NAC).


 

This entry was posted in FASB.

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