Daniel Kaminski, CPA
Senior Manager
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.
