In Part 1 of our NFP Reporting Model series, we discussed FASB's proposed ASU on the presentation ot financial statements of not-for-profit entities and how this proposal could change the current three classifications of net assets from three to two. In Part 2, we discussed the treatment of endowments without donor restrictions, commonly referred to as board-designated endowment or quasi-endowment fund.
The Financial Accounting Standards Board (FASB) issued an exposure draft on the financial statement presentation of not-for-profit (NFP) entities this past April, with comments on the exposure draft due in August 2015. One new requirement for NFP financial reporting that is discussed within the exposure draft is the concept of performance measurement.
Accounting principles generally accepted in the United States do not currently require an NFP to report operating measures nor do they provide any definitions for operating measures. If an NFP does report an operating measure, the definition likely varies among organizations, making it a challenge for users of the financial statements to compare performance and financial results. Further, the manner in which operating activities are reported within a statement of activities conflicts with the definition of operating cash flows in the statement of cash flows.
The Proposed Guidance Changes to FASB's ASU on the Presentation of Financial Statements of Not-for-Profit Entities Regarding Measuring Performance
Within the proposed guidance, in order to improve and standardize information presented in the financial statements and notes, there will be two subtotals on an NFP’s statement of activities associated with changes in net assets without donor restrictions that will distinguish current-period operating activities from other activities as follows:
- The first subtotal on the statement of activities will include operating revenues, support, expenses, gains and losses without donor-imposed restrictions. This will aid management and governing boards with benchmarking their institution against peers within their industries.
- The second subtotal on the statement of activities will include the effects of internal transfers resulting from governing board designations, appropriations, and any similar actions that place/remove self-imposed limits on the use of resources that make them unavailable/available for current-period operating activities. This will allow NFPs to be able to provide information about how the NFP’s operations are managed.
The FASB’s intent behind this new requirement is to provide a level of consistency in order for creditors, donors and other external users to be able to understand and assess financial performance of an NFP entity and make comparisons against other similar NFP entities.
Read Part 1 of our NFP Reporting Model series about net asset classification.
Read Part 2 of our NFP Reporting Model series about the treatment of endowments.
Read Part 4 of our NFP Reporting Model series about measuring and disclosing liquidity.