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Proposed Changes to Not-for-Profit Financial Reporting

On April 22, 2015, the Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update (ASU) seeking to improve the clarity and usefulness of not-for-profit organization (NFP) financial statements and notes. The amendments focus on net asset classifications and improving stakeholders’ ability to assess an NFP’s liquidity, financial performance, and cash flows. The amendments would affect all NFPs.

The primary changes from current GAAP include the following:

  1. Currently, NFP’s report net assets in three categories: unrestricted, temporarily restricted, and permanently restricted. The proposed ASU would eliminate the categories temporarily restricted and permanently restricted. Rather, the statement of financial position would report amounts for net assets with donor restrictions and net assets without donor restrictions. The FASB has found the distinction between temporarily and permanently restricted net assets to be increasingly blurred. Additional disclosures about the types of restrictions would also be required. The statement of activities would present the corresponding changes in each of the two new classes of net assets.
  2. Under the proposed ASU, the statement of activities would present additional subtotals. These subtotals would distinguish operating activities from other activities based on whether the resources are directed at carrying out the NFP’s mission and are available for the current period. Also, the statement of activities would show activity before and after internal transfers (i.e. board designations, self-imposed limits, or other items) for both operating activities and other activities.
  3. Require using the direct method of reporting on the statement of cash flows. Certain cash flows would also be presented differently to better match the statement of activities.
  4. Previously, some NFPs were required to present expenses by both functional and natural classifications. This information would be required for all NFPs whether disclosed as a separate statement or in the notes to the financial statements.

These changes would be applied on a retrospective basis. In the year the update is effective, NFPs would disclose the nature of any reclassifications or restatements, and their effects. The proposed ASU has a comment period ending August 20, 2015. To learn more, visit FASB’s Not-for-Profits page offering additional information and updates.

Read FASB’s Proposed Accounting Standards Update for NFP’s here.

Gary J. Robb, CPA, is a Senior Accountant with AHP’s Auburn Hills office. His industry focus includes governmental organizations, not-for-profit entities, financial institutions, and insurance entities.