Presentation of Financial Statements of Nonprofit Entities Update
By Jack Murray, HoganTaylor Lead Nonprofit Partner
The Financial Accounting Standards Board (FASB) met on Friday December 11, 2015, to discuss certain topics of the proposed FASB Accounting Standards Update. The Comment Period for the Exposure Draft that was issued in April of 2015 ended in October of 2015. FASB received a significant amount of comments, and the staff has been reviewing the comments in order for the FASB to deliberate revisions to the Exposure Draft. The discussion during the meeting covered topics that the FASB has identified as Phase One of the project. Phase One includes topics from the proposed update that the FASB has support from stakeholders, are not dependent on other projects, and are improvements the FASB might be able to finalize in the near term.
Phase Two of the proposed update includes topics that the FASB believes need additional research. It also includes topics that may require reconsideration of other proposed changes that are likely to require more time to resolve because they are related to similar topics being addressed in other projects or involve consideration of alternatives not initially considered.
It is thought that FASB might complete deliberations of Phase One of the project by mid-summer with Phase Two following at a later date.
Methods of Presenting Operating Cash Flows:
The Board decided not to require not-for-profit entities (NFPs) to use the direct method of presenting operating cash flows, but instead to continue to allow them to use either the direct method or indirect method. Further, the Board decided to no longer require the indirect reconciliation if an NFP chooses to use the direct method.
Net Asset Classification Scheme and Related Issues
The Board made decisions on the following issues:
- Requirement of two classes of net assets
- The Board affirmed its proposal to combine temporarily and permanently restricted net assets into net assets with donor restrictions and to rename unrestricted net assets to net assets without donor restrictions. Consistent with the proposed Update, this alternative would retain the current generally accepted accounting principles (GAAP) requirement to provide relevant information about the nature and amounts of donor restrictions on net assets (either on the face of the statement of financial position or in notes).
- Disclosure of amounts and purposes of board-designated net assets
- The Board affirmed its proposal to require the disclosure of the amounts and purposes of board-designated net assets either on the face of the financial statement or in the notes.
- Classification and disclosure of underwater endowments
- The Board affirmed its proposal to require that the aggregate amount by which endowment funds are underwater be classified within net assets with donor restrictions rather than the current unrestricted category.
- The Board decided to affirm its proposal for endowment funds that are underwater, if any, to require the disclosure of:
- The NFP’s policy to either reduce expenditure or not spend from underwater endowment funds;
- The aggregate fair value;
- The aggregate original endowment gift amount or level required by donor stipulations or by law to be maintained; and
- The aggregate of the amount of the deficiencies.
- Requirement of placed-in-service approach and elimination of over-time approach for expirations of restrictions to acquire or construct long-lived assets
- The Board affirmed its proposal to require, in the absence of explicit donor instructions, the placed-in-service approach for expirations of restrictions to acquire or construct long-lived assets, thus eliminating the over-time approach.
Information Useful in Assessing Liquidity
The Board discussed the proposal for providing qualitative and quantitative information useful for assessing liquidity and potential alternatives. The Board directed the staff to explore an approach that would require, like the proposal, qualitative information about how the NFP manages its liquidity and liquidity risks, but provide alternative ways of presenting quantitative information. This approach would emphasize information about assets that are liquid and available at the balance sheet date.
The next meeting of the FASB on the proposed update is currently scheduled to be held on January 27, 2016. At that meeting, the FASB is expected to discuss the proposed treatment of expenses as previously discussed.