The Financial Accounting Standards Board (FASB) has issued a proposed Accounting Standards Update (ASU) which would significantly change a 20-year-old financial reporting model. 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, is intended to simplify the current net asset classification requirements and the presentation of information in financial statements and footnotes about liquidity, financial performance and cash flows. The ASU wouldn’t change the information being reported, but would require it to be presented in a more consistent manner that would be easier for users of financial statements to understand.
Among other changes, the proposed update would eliminate the requirement that nonprofits present temporarily restricted assets and permanently restricted net assets — and transactions in each of those asset classes — separately. Instead, a nonprofit would report amounts for “net assets with donor restrictions” and “net assets without donor restrictions,” along with the currently required amount for total net assets.
The proposed update also would require changes to the reporting of operating activities on the statements of activities, with investment income generally not included in the results of operations. The proposed presentation would be more consistent with the method many nonprofits currently use to track budget vs. actual results. In another change, nonprofits would be required to present on their statements of activities a uniform measure of operations — reflecting their mission and the availability of funds.
Additionally, nonprofits would be required to present their operating cash flows using the direct method, which provides more meaningful information to users than the currently allowed indirect method. And nonprofits would need to provide enhanced disclosures on several matters, including liquidity of assets and operating expenses by nature and function.
This fall, the FASB received harsh feedback on the proposal and has decided to focus its efforts on the aspects of the proposal that received support and delay work on some of the more controvercial parts.