Recently, for the first time in two decades, the Financial Accounting Standards Board (FASB) proposed substantial changes for nonprofit companies. These changes include simplified net asset classification, clearer note disclosures to better evaluate liquidity, detailed expense reporting, and a more comprehensible statement of cash flows. Instituting these changes is intended to improve not-for-profit financial statements in a way that would better serve financial statement users.
Many of the reporting modifications were tightly embraced; the change from a three-tiered net asset section to a two-tiered one is a win-win for preparers and users alike. However, FASB still faced considerable opposition to the broad changes. The dissent was in the details. For example, while many supported the idea of an easier to understand statement of cash flows, others suggested the proposed change (which included dividends reported as an investment activity versus an operating activity) would only cause confusion. Some even argued that the statement of cash flows is of little use to key users such as creditors and donors, resulting in useless changes to that statement.
In response to the divergent reactions toward the changes, FASB broke the project down into two phases. Phase 1 will provide immediate, direct improvements to not-for-profit financial reporting. Phase 1 will classify net assets only as “restricted” or “unrestricted,” report expenses by function, and change how liquidity is illustrated on the balance sheet. Since FASB looks to align the way nonprofits report financial statements with the for-profit model, Phase 2 will depend on the time frame for applying changes to for-profits.
The final Accounting Standards Update (ASU) is expected to be published later this summer. The Board has set the amendments to be effective for fiscal years beginning after December 15, 2017, and for interim periods beginning after December 15, 2018. Early adoption would be permitted.
If you have questions about this ASU, or would like to request a speaker on this topic for your organization or event, contact one of our executives listed below, (800) 270-9629.