OUR THOUGHTS ON:

Not Your Father's Financial Statements - Possible Changes Ahead for Not-for-Profit Financial Statements

Not-for-Profit

By Kurt Herdman

As we wrap up another reporting season for our not-for-profit (NFP) clients, I am reminded of some of the inherent complexities within financial reporting in the NFP community.  The Financial Accounting Standards Board (FASB) is also well aware of this, and has formed the Not-for-Profit Advisory Committee or NAC for short.  The NAC was formed to address these complexities and to develop proposed solutions to a number of challenges within NFP financial reporting.  The NAC’s most recent meeting was held on September 4th and 5th, and a brief summary of the key recommended changes that have been presented to the FASB to date are as follows:

  1. Net asset classification - Currently not-for-profits have three classifications of net assets, unrestricted, temporarily restricted, and permanently restricted funds.  The NAC’s recommendations are to move the temporarily and permanently restricted funds into one classification, “with donor restrictions”.  In addition, the NAC is also recommending that amounts and purposes of board designations also be appropriately disclosed.
  2. Operating indicator - Currently there is a lack of consistency among not-for-profits (healthcare entities excluded) in the reporting of an operating indicator.  The NAC is recommending that NFP’s include operating and non-operating sections in the statement of activities to enhance transparency to the reader of the financial statements.
  3. Statement of cash flows - Currently most NFP’s financial statements utilize the indirect method of reporting operating cash flows.  The NAC is recommending that NFP’s should be required to utilize the direct method of reporting operating cash flows.
  4. Statement of functional expenses - Currently, not all NFP’s are required to report in their financial statements a statement of functional expenses.  The current NAC proposal is to require all NFP’s to present a statement of functional expenses.

In its October meeting, the FASB has directed their staff to begin the exposure draft on the proposed changes, which is expected to be issued for comment within the next few months.  The good news with all of these proposals is that the underlying accounting behind these transactions is not changing; however, the presentation and disclosure of these items will change.  NFP’s should watch for the issuance of the exposure draft and determine what impact they will have on their financial reporting.  Ultimately, these changes should enhance comparability and lead to increased transparency of financial operations, something we all can agree is of benefit to NFPs. 

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© 2018 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

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