FASB Proposes Substantial Accounting Changes for Nonprofits

On April 22, 2015, the Financial Account Standards Board (FASB) proposed changes to the financial reporting requirements for not-for-profit organizations (NFPs). The proposal is intended to improve the current requirements for net asset classification and the information presented in the financial statements and notes regarding liquidity, financial performance and cash flows for NFPs. While these proposed changes would substantially impact most NFPs, they are a result of nearly four years of work by the Not-For-Profit Advisory Committee to update the current reporting model, which has been in place and relatively unchanged for over twenty years.

The goal of the proposed guidance is to enhance the financial statements of not-for-profit organizations, make not-for-profit financial statements more comparable within the industry, and provide more useful and relevant information to users of the financial statements, including external parties such as donors, lenders, and other stakeholders that use their financial statements.

The intention of the proposed guidance is to address current financial reporting issues for NFPs. Some of the significant changes include:

• Reducing the number of net asset classes from three to two: net assets with donor-imposed restrictions and net assets without donor-imposed restrictions;
• The use of intermediate measures of operations on the statement of activities;
• Presentation of operating expenses on both a functional and a natural classification basis for all NFPs (not just voluntary health and welfare organizations);
• Requiring the presentation of operating cash flows using the direct method, and re-categorization of items reported in the statement of cash flows to align with the proposed definition of operations in the statement of activities; and,
• Enhance liquidity disclosures requiring both quantitative and qualitative information about financial assets and near-term demands.

The FASB has also issued their “in plain English” guide, known as FASB In Focus, which provides a concise summary of the major initiatives.

The FASB is currently accepting written letters of comment until August 20, 2015. We will keep you posted on the effective date of the proposed guidance and necessary next steps for not-for-profit organizations.

If you have any questions regarding this proposed guidance, please contact me.