On April 22, 2015, the Financial Accounting Standards Board (FASB) released the long-awaited exposure draft for the proposed accounting standards update, Not-for-Profit Entities (ASC Topic 958) and Health Care Entities (ASC Topic 954): Presentation of Financial Statements of Not-for-Profit Entities.
As expected, significant provisions include:
- A move to two classes of net assets – with and without donor restrictions.
- Incorporating the concept of an operating measure in not-for-profit financial statements. (Health care entities have been using operating results for quite some time.)
- Changing how board-designated assets are reflected in the statement of activities.
- Requiring the use of the direct method of reporting in the statement of cash flows.
- Changing how cash flows from certain activities are reflected in the statement of cash flows (e.g., purchases of long-lived assets).
- Enhancing footnote disclosures in the following areas:
- Governing board designations
- Net assets with donor restrictions
- Expenses, including amounts for operating expenses by both their nature and function.
- Expense allocation methodologies
- Underwater endowment funds
- Eliminating the option to release the donor-imposed restriction over the estimated useful life of an acquired asset.
- Reporting investment income net of external and direct internal investment expenses.
These proposed changes represent the largest shift in not-for-profit reporting since the implementation of FAS 116 and FAS 117 in the mid-1990s, and will impact organizations across the entire not-for-profit sector. Over the coming months, we will be highlighting each provision of the Proposed Standard in a Financial Reporting Series, in order to take a deeper dive into the Standard and the potential impact to the sector. The comment deadline is August 20, 2015. We encourage organizations to familiarize themselves with the Proposal. Your feedback will be critical in the development of the final Standard. Read the complete copy of the FASB exposure draft for the proposed accounting standards update, Not-for-Profit Entities (ASC Topic 958) and Health Care Entities (ASC Topic 954): Presentation of Financial Statements of Not-for-Profit Entities.