Volume 22, Issue 14

by Joan Schweizer, Adrian Mills, and Andrew Warren, Deloitte & Touche LLP

On April 22, 2015, the FASB issued a proposed ASU¹ that would significantly change the existing presentation requirements for financial statements of not-for-profit entities (NFPs). The proposal is intended to improve the current requirements for net asset classification as well as the information presented in the financial statements and notes to the financial statements regarding liquidity, financial performance, and cash flows for NFPs. Specifically, the proposed ASU addresses (1) the complexity and understandability of net asset classifications, (2) inconsistent reporting of intermediate measures of operations in the statement of activities, (3) lack of consistency in the type of information provided about expenses for a period, and (4) inconsistencies in the reporting of operating information in the statement of activities and operating cash flows within the statement of cash flows.

The proposal would affect NFPs and would amend ASC 958² as well as certain requirements in ASC 954.

This Heads Up summarizes key provisions of the proposed ASU. Comments on the proposal are due by August 20, 2015.

Main Provisions of the Proposed ASU

Net Assets

Under existing U.S. GAAP, three classes of net assets (unrestricted, temporarily restricted, and permanently restricted) are presented in the statement of financial position. Under the proposed ASU, however, an NFP would present only two classes of net assets (net assets with donor restrictions and net assets without donor restrictions) in the statement of financial position at the end of the period. See Appendix A for an example that illustrates how an NFP would adjust the presentation of net assets in its statement of financial position to reflect these two classes instead of the three classes required under current guidance.

Statement of Activities

Under the proposed ASU, an NFP would present in the statement of activities the change in each of the two new classes of net assets in a manner similar to how it presents the change in each of the three net asset classes specified under current guidance. An NFP would also be required to present in the statement of activities two additional subtotals for activities associated with changes in net assets without donor restrictions:

a. The first subtotal includes operating revenues, support, expenses, gains, and losses that are without donor-imposed restrictions and is before internal transfers.
b. The second subtotal includes the effects of internal transfers resulting from governing board designations, appropriations, and similar actions that place (or remove) self-imposed limits on the use of resources that make them unavailable (or available) for current-period operating activities.

See Appendix B for a sample presentation of an NFP’s statement of activities showing the two new subtotals that would be required under the proposed ASU.

There would no longer be a requirement to present the intermediate measure of operations on the same page as the change in net assets without donor restrictions (though an NFP can still choose to do so). In addition, the proposed ASU would eliminate the guidance in ASC 954-225-45-4 requiring business-oriented health care NFPs to present a performance indicator.

Further, the proposed ASU would remove the guidance requiring voluntary health and welfare organizations to provide a statement of functional expenses and instead would require all NFPs to present information about the nature and function of such expenses (1) in the statement of activities, (2) as a separate statement, or (3) in the notes to the financial statements. In addition, investment income would be reported net of external and direct internal investment expense.

Statement of Cash Flows

Under the proposal, an NFP would be required to report in the statement of cash flows the net amount for operating cash flows by using the direct method of accounting.

The proposed ASU would further change current practice for NFPs and differentiate NFPs’ cash flow presentation from that of for-profit entities by requiring NFPs to present:

• Purchases of long-lived assets, contributions restricted to acquire long-lived assets, and sales of long-lived assets as operating cash flows rather than as investing cash flows.
• Payments of interest on borrowings (including cash management activities) as financing cash flows rather than as operating cash flows.
• Receipts of interest and dividends on loans and investments (other than those made for programmatic purposes) as investing cash flows rather than as operating cash flows.

Disclosures

The proposed ASU would enhance the disclosure requirements for NFPs. Under its provisions, an NFP would be required to disclose the following:

• “Governing board designations, appropriations, and similar transfers that result in the addition or removal of self-imposed limits on the use of resources without donor imposed restrictions.”
• “Composition of net assets with donor restrictions at the end of the period and how the restrictions affect the use of resources.”
• “Management of liquidity and quantitative information as of the reporting date about financial assets available to meet near-term demands for cash, including demands resulting from near-term financial liabilities.”
• “Expenses, including amounts for operating expenses by both their nature and function.”
• “Method(s) used to allocate costs among program and support functions.”
• “Underwater endowment funds, which are donor-restricted endowment funds for which the fair value of the fund is less than either the original gift amount or the amount required to be maintained by the donor or law.”

Effective Date and Transition

The proposed ASU would be applied on a retrospective basis, but the application to interim financial statements would not be required in the initial year of adoption. However, if the interim information is included in the annual financial statements in the year of adoption, the interim periods would need to be retrospectively adjusted. Upon adoption, an entity would disclose the nature of any reclassifications or restatements and their impact on net assets for the years presented in the financial statements.

The Board will determine the effective date after reviewing feedback on the proposed ASU. It tentatively plans to hold two roundtable meetings to solicit stakeholders’ views. The first meeting is planned for September 21, 2015, at the FASB’s office in Norwalk, Connecticut; the second is expected to be held on the West Coast on October 6, 2015. ^{3 4}

Appendix A — Statement of Financial Position Showing Revised Net Asset Classes

The example below, which is reproduced from the proposed ASU, illustrates how an NFP would adjust the presentation of net assets in its statement of financial position to reflect two classes rather than the three classes required under current guidance.

Appendix B — Statement of Activities Showing Two New Subtotals

The example below, which is reproduced from the proposed ASU, illustrates how an NFP’s statement of activities would be presented to reflect two additional subtotals for activities associated with changes in net assets without donor restrictions.

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