FASB Makes Changes to Not-for-Profit Accounting Standards Update

 

 

Daniel Kaminski, CPA

Senior Manager

kaminski@hwco.com

 

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Proposed Accounting Standards Update (ASU) No. 2015-230, Not-for-Profit Entities (Topic 958) and Health Care Entities (Topic 954): Presentation of Financial Statements of Not-for-Profit Entities.  One of the most controversial items in the ASU was the requirement that not-for-profit organizations would be required to present their statement of cash flows using the direct method.

The FASB received comments that requiring the use of the direct method would cause significant challenges.  Not-for-profit organizations felt that it would be difficult for readers of their financial statements to make comparisons with for-profit companies who would not be required to use the direct method.  The second common complaint came from smaller not-for-profits who felt that using the direct method would cause them to incur significant costs, either internally or by increased costs from their outside accountants.

 

As a result, on December 11, 2015, the FASB made the decision it would not require not-for-profit organizations to use the direct method, but would give them the option to use the direct method or the indirect method.  However, this was not the FASB’s only change.  Currently, U.S. generally accepted accounting principles (GAAP) allows for a choice between using the direct method or the indirect method.  However, if the direct method is chosen, the indirect method must also be presented.  However, the FASB has decided it would no longer require the presentation of the indirect method if an organization chooses to present their statement of cash flows under the direct method.

Even though the direct method can be more useful to financial statement users, since the indirect was required to be presented, very few organizations chose to do the additional work or presenting under the direct method as well.  The FASB’s hope is that by eliminating the requirement to also present the indirect method; more organizations will choose to use the direct method.

 

The FASB also clarified a few other items in the ASU.  The FASB had previously decided to reduce the number classifications of net assets from three to two.  They officially decided the two new classifications will be called “net assets with donor restrictions” and “net assets without donor restrictions.”  In addition, the FASB will require the purpose of board-designated net assets to be disclosed either on the face of the financial statement or in the notes.  The FASB also is requiring the aggregate amount that endowment funds are underwater be included in net assets with donor restrictions and is requiring enhanced disclosures about the underwater endowment funds.

First Major Changes to Not-For-Profit Accounting

 

 

Anthony S. LaNasa, CPA, CFE

Principal at HW&Co.

 

On March 4^th, 2015 the Financial Accounting Standards Board voted to release a proposal that will overhaul how universities, charities, foundations, and other not-for-profit organizations convey how they spend their time and how they invest their money.  With this decision came some dissatisfaction with this standard. The uneasiness that came from the decision is even stronger than anyone had initially thought.  This was especially conveyed by the dissenting votes of FASB Chairman Russell Golden and Vice Chairman James Kroeker. It should also be mentioned that two of the five board members who voted in favor of the proposal did so with reservations.

 

The chief concern that Golden has concerning this decision was his belief that the proposal would create too many reporting differences between not-for-profit organizations and for-profit business.  He also believes that the projected changes would go too far.  Kroeker, who was unable to attend the meeting and voted by proxy, said in a prepared statement that he didn’t agree with the changes that would be made to the not-for-profit groups cash flow statements.

 

Although there was concern about the changes to the cash flow statements for members like, Lawrence Smith, the benefits of changing to the proposal weren’t enough to make him vote against it.

 

“I didn’t object to it and I voted for the changes made because I think when you look at the two cash flow statements side by side, one under direct and one under indirect, it’s pretty obvious the direct method conveys more easily understood information than indirect,” he stated.  He further commented on his decision to vote in favor of the proposal by praising the changes made to the basic performance statement.

 

"Is there flexibility? Yes. There's flexibility up the wazoo in terms of how management designates things, but it's clearly laid out and that's the important thing," he said. "It clearly lays out what funds are available to an entity in terms of furthering its mission."

 

The FASB also would like to improve the statement of activities by including the presentation of an operating measure with the information about expenditures related to the organization’s mission and donated funds available to be spent.

 

The changes in the proposal will be the first major changes to not-for-profit accounting and reporting in over 20 years.  My opinion is that the proposal is long overdue and the changes will enhance not-for-profit financial statements and provide the users of the financial statements, like donors, an increased understanding of the financial performance of Organizations.

 

 

This blog is published periodically by HW&Co. as an information service to our clients, business associates and friends. It is general information and professional advice should be obtained before acting on any comments contained in this document.