FASB Issues Long-Awaited Nonprofit Financial Reporting Standard

By: Tim McCutcheonTim McCutcheon

The Financial Accounting Standards Board (FASB) has issued its long-awaited and much debated Accounting Standards Update (ASU) 2016-14, Presentation of Financial Statements for Not-for-Profit Entities. The ASU is the first in a two-phase project, and will change the way all not-for-profits (NFPs) classify net assets, prepare financial statements, and disclose certain liquidity and other information. The ASU is effective for fiscal years beginning after December 15, 2017 (i.e., for years ending December 31, 2018 and beyond). Early application is permitted by FASB. The amendments should be applied on a retrospective basis in the year that the ASU is first applied, with some optional exceptions. Obtain the ASU from FASB by clicking here.

FASB believes the new standard will improve NFP financial reporting by:

  • Reducing the complexity in net asset classification by eliminating the concept of permanently restricted net assets; this better aligns with the provisions of the Uniform Prudent Management of Institutional Funds Act (UPMIFA)
  • Improving the transparency and utility of information regarding liquidity and availability of cash to meet general expenditures
  • Increasing information as to what is and is not included in an entity’s financial performance measure
  • Eliminating inconsistencies in the type of information provided in reporting of expenses by function and nature across NFPs
  • Eliminating the requirement to prepare the indirect method reconciliation if an NFP chooses to use the direct method of presenting operating cash flows

For more information, read the full article here.

FASB Wants Not-for-Profits to Correct Improper Exclusions From Their Operating Measures

By: Tim McCutcheonTimMccutcheon

Current U.S. Generally Accepted Accounting Principles (GAAP) permit, but do not require not-for-profit organizations (NFPs) to present a measure of operations. Paragraph 958-225-45-9 of the FASB Accounting Standards Codification (ASC) provides examples of the ways NFPs could present such a measure.

ASC 958-225-45-9

Classifying revenues, expenses, gains, and losses within classes of net assets does not preclude incorporating additional classifications within a statement of activities. For example, within a class or classes of changes in net assets, an NFP may classify items as follows:

  1. Operating and nonoperating
  2. Expendable and nonexpendable
  3. Earned and unearned
  4. Recurring and nonrecurring
  5. In other ways. Entities choosing to report an operating measure also must follow ASC 958-225-45-12, which refers to ASC 958-225-50-1, which in turn provides that if an NFP’s use of the term operations is not apparent from the details provided on the face of the statement, a note to financial statements is required to describe the nature of the reported measure of operations or the items excluded from operations.
  6. ASC 958-225-45-10 goes on to state that those further classifications are neither encouraged nor discouraged. However, because the terms commonly used by NFPs, such as “operating income”, “operating profit”, “operating surplus”, “operating deficit”, or “results of operations”, are used with different meanings, NFPs reporting an intermediate measure of operations (for example, Excess or deficit of operating revenues over expenses) may only do so in a financial statement that, at a minimum, reports the Change in unrestricted net assets for the period. Example 1 in ASC 958-225-55-5 provides an illustration of such a presentation.

NFPs are not required to present any other disclosures about their reported intermediate measure of operations.

In its March 2, 2016 meeting, the Financial Accounting Standards Board (FASB) was briefed by FASB staff on a compliance issue it has observed in practice regarding the exclusion of the following items from an NFP’s self-defined operating measure:

  1. An impairment loss recognized for a long-lived asset (asset group) to be held and used, pursuant to paragraph 360-10-45-4
  2. Costs associated with an exit or disposal activity that does not involve a discontinued operation, pursuant to paragraph 420-10-45-3
  3. A gain or loss recognized on the sale of a long-lived asset (disposal group) that is not a component of an entity, pursuant to paragraph 360-10-45-5[1]

Noting that some NFPs include a footnote disclosure of their policy to classify these gains and losses as nonoperating, staff made clear that excluding such gains and losses from the operating measure is a violation of GAAP, unless such instances are immaterial.


[1] The amendments in the proposed FASB Accounting Standards Update, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, would require entities to report the service cost component of pensions in operations (as a compensation cost) and any other components of net benefit cost outside a subtotal of income from operations. This new requirement, if finalized, would apply to NFPs that choose to present a self-defined operating measure, adding to the above list of specific items that must be included in the measure of operations, if presented.

An Update: FASB Financial Statements Project

By: Tim McCutcheonTimMccutcheon

The meeting summary from the FASB’s October 28th meeting pertaining to the Board’s consideration of the Exposure Draft for NFP financial reporting is out. There is also a video recording of the FASB Board meeting where the redeliberation plan was discussed. The video portion of the meeting where the exposure draft was discussed lasts about 30 minutes, other than breaks, and is the first topic. The board chose one of two alternatives proposed by staff. The option chosen divides the proposed update into two workstreams:

  • Workstream 1 includes issues that are not dependent on (interconnected with) other projects and have a clear path or paths forward at this time.
  • Workstream 2 includes issues that are dependent on (interconnected with) other projects and would likely require more substantial staff research of alternatives suggested by respondents, extensive Board redeliberations, additional outreach, and a re-exposure of revised proposals.

Workstream 1 is expected to be completed by June 30, 2016, after which work on Workstream 2 would begin. Of course, Workstream 2 activities would be subject to modification (additions, deletions, or even discontinuation of it in its entirety) at some point in the future. However, for now both Workstreams remain on FASB’s agenda.


FASB to Develop Draft on the Not-for-Profit Financial Statement Project for External Review

Due to feedback provided by the Not-for-Profit Advisory Committee (NAC), the Financial Accounting Standards Board (FASB) reconsidered in its October meeting two positions

on areas affecting the intermediate measure of operations to be reported in the statement of activities:

  • The treatment of capital gifts
  • The use of board designations and transfers

NAC members previously expressed concern over the cost and complexity of making certain changes in the areas of capital-like transactions and board designations, appropriations, and similar transfers (collectively referred to as transfers).



FASB is now proposing that not-for-profit (NFP) entities would report the receipt of gifts of long-lived assets without donor restrictions as operating revenue. When the assets are placed in service (instead of being sold), the NFP would report a transfer out of operations for the entire amount of the gifted long-lived asset. (This is a welcome change that reduces the complexity of FASB’s prior decision, which would have required entities to report a transfer out of current operations for the amount of the gifted long-lived asset expected to be utilized in future periods, and back into current operations in subsequent periods to the extent long-lived assets are utilized during the current reporting period.)

The revised position reflects the view that, when an NFP begins using a capital asset, the revenue generated from the activities related to the asset will be matched with the depreciation recorded on the asset. Both are recorded in current operations.

Gifts of cash that are donor restricted for the acquisition or construction of long-lived assets would initially be reported as revenue that increases net assets with donor restrictions, which is reported outside of operations. When the asset is placed in service, the release of the donor restriction would be reported as an increase in net assets without donor restrictions (within current-year operating activity) and a corresponding decrease in net assets with donor restrictions. This amount would be reported as a transfer from operations to non-operating activities, similar to the treatment of long-lived assets, and there would be no transfers back into operations in subsequent periods.

FASB also addressed concerns about the degree of flexibility regarding board designations, appropriations, and similar transfers. They concluded that several key requirements were necessary:

  1. Present all transfers in a separate, discrete section in the statement of activities.
  2. Include a subtotal of operating revenues and expenses before and after such transfers.
  3. Present the aggregate of transfers out of operating activities separate from of aggregate transfers into operating activities.
  4. When an NFP does not present all transfers as discrete line items in the statement of activities, it should provide details for aggregated transfers in a note to the financial statements.
  5. NFPs must describe the purpose, amounts, and types of transfers incurred, e.g. transfers arising from standing board policies and those arising from one-time decisions.

FASB directed staff to prepare a draft on the Not-for-Profit Financial Statement project for external review, and will wait for the results of this review before voting on issuing a proposal, expected in early 2015.

Accounting Standards You Should Consider When Closing Your Books for the Fiscal Year

As non-profits with June fiscal year ends start the process of closing their books for the year and begin the financial reporting process, there are new accounting standards that should be considered.  There is one new accounting standard in 2014 financial statements, and some that will affect 2015 financial statements, but should be applied to operations beginning in July of 2014. A summary of these accounting standards follows.

Classification of the Sale Proceeds of Donated Financial Assets in the Statement of Cash Flows
In October 2012, the FASB issued an accounting standard that requires a non-profit to consistently classify, within a statement of cash flows, cash receipts from the sale of donated financial assets with cash donations received for similar purposes. The cash receipts from the sale of donated financial assets must, upon receipt, have been directed without any non-profit imposed limitations for sale and converted nearly immediately into cash. Accordingly, the cash receipts from the sale of those financial assets should be classified as cash inflows from operating activities, unless the donor restricted the use of the contributed resources to long-term purposes, in which case, those cash receipts should be classified as cash flows from financing activities. Otherwise, cash receipts from the sale of donated financial assets should be classified as cash flows from investing activities by the non-profit.

The accounting standard provided a decision tree to illustrate the process that can be used to help determine the appropriate presentation of the cash receipts in the cash flow statement. This accounting guidance is effective prospectively for June 30, 2014 fiscal year ends. Retrospective application to prior periods is permitted but not required in the case where comparative financial statements are presented.

Obligations Resulting from Joint and Several Liability Arrangements
In February 2013, the FASB issued an accounting standard to provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of the guidance is fixed at the reporting date. Examples of obligations within the scope of this accounting guidance include debt arrangements, other contractual obligations, and settled litigation and judicial rulings.

This accounting guidance requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date, as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors, and any additional amount the reporting entity expects to pay on behalf of its co-obligors.

Entities are also required to disclose the nature and amount of the obligation as well as other information about those obligations.

This accounting guidance is effective for December 31, 2014 fiscal year ends. The changes required by this accounting guidance should be applied retrospectively to all prior periods presented if comparative financial statements are presented, so non-profits that present comparative financial statements should determine the applicability of this accounting guidance to determine what effects it may have on the current year financial statements when it is required to be adopted in the upcoming fiscal year.

Recognizing Services Received from Personnel of an Affiliate
In April 2013, the FASB issued accounting guidance which addresses the situation in which employees of a separately governed affiliated entity regularly perform services (in other than an advisory capacity) for, and under the direction of, the recipient entity. This new accounting guidance requires a recipient non-profit to recognize all services received from personnel of an affiliate that directly benefit the recipient non-profit. Generally, those services should be measured at the cost recognized by the affiliate for the personnel providing those services. However, if measuring a service received from personnel of an affiliate at cost will significantly overstate or understate the value of the service received, the recipient non-profit may elect to recognize that service received at either the cost recognized by the affiliate for the personnel providing that service, or the fair value of that service.

This accounting guidance is effective for fiscal years ending June 30, 2015, so non-profits that receive services from personnel of an affiliate will need to consider how the services are being recorded beginning this July.

Service Concession Arrangements
In January 2014, the FASB issued an accounting standard which provides specific accounting guidance related to service concession agreements. This accounting guidance clarifies that an arrangement should not be accounted for as a lease when it contains both of the following conditions:

  • The grantor controls, or has the ability to modify or approve, the services that the operating entity must provide with the infrastructure, to whom it must provide them, and at what price.
  • The grantor controls, through ownership, beneficial entitlement, or otherwise, any residual interest in the infrastructure at the end of the term of the arrangement.

This accounting guidance is effective beginning with December 2015 fiscal year-end entities, so December year-end non-profits will need to begin following this accounting guidance January 1, 2015.

If you have questions about any of these new accounting standards, please contact an Eide Bailly professional. They will be happy to answer your questions.

FASB Board Meeting Tentative Decisions on Financial Statements of Not-for-Profit Entities



On May 28, FASB continued its discussions on changes to the financial statements of not-for-profit organizations, focusing on the presentation and disclosure of information useful in assessing liquidity. The Board decided that an entity should define the time horizon it uses to manage its liquidity (for example, 30, 60, or 90 days) and disclose the following information:

  1. Quantitative information about:
    1. The total amount of financial assets
    2. Amounts that are not available to meet cash needs within the time horizon because of restrictions (limits) imposed by contract (or law), donors, or actions of its governing board
    3. The total amount of financial liabilities that are due within that time horizon.
  2. Qualitative information about how the entity manages its liquidity. For example, an entity might disclose:
    1. Its strategy for addressing entity-wide risks that may affect liquidity, including its use of lines of credit
    2. Its policy for establishing liquidity reserves
    3. Its basis for determining the time horizon used for managing liquidity.

The decisions are tentative and may be changed at future Board Meetings.

FASB Continues Deliberations On Not-for-Profit Financial Statements

May 14, 2014 FASB Board Meeting



Financial Statements of Not-for-Profit Entities. The Board continued its deliberations about the presentation and disclosure of investment expenses and an intermediate measure of operations in light of the results of staff outreach with stakeholders of foundations and health care entities. The Board decided that:

  1. All not-for-profit (NFP) entities would be required to disclose identifiable, direct external investment expenses and the amount of direct internal investment expenses incurred during the period.
  2. An NFP business-oriented health care entity would be required to present an intermediate measure of operations as previously defined by the Board in this project. Those entities would have the option of also presenting the performance indicator that is currently required by paragraph 954-225-45-4. As a result of this decision, all NFP entities including health care entities would be required to present the same intermediate measure of operations.