The Financial Accounting Standards Board (FASB) recently issued an exposure draft titled Not-for-Profit Entities (Topic 958) and Healthcare Entities (Topic 954) Presentation of Financial Statements of Not-for-Profit Entities. While this exposure draft involves only proposed standards, organizations may want to consider the potential impact on their financial statements and, if appropriate, respond to FASB with feedback within the comment period. Comments on this exposure draft are due August 20, 2015.
This exposure draft is intended to improve the current net asset classifications presented in the financial statements of not-for-profit entities and applicable healthcare entities, as well as provide additional information to users about liquidity, financial performance, and cash flows.
Under the proposed standard, the classification of net assets would be reduced from the currently required three classifications to two classifications: net assets with donor restrictions and net assets without donor restrictions. The statement of activities will report the changes in only those two net asset classifications.
The statement of activities also would include two required captions related to operating activities associated with the changes in net assets without donor restrictions. These subtotals would reflect operating activities for the period and distinguish those from other activities (those not directed at carrying out the not-for-profit’s mission). These other activities may not necessarily be consistent with the current classification of items in operating income or loss.
The exposure draft would require that the cash flow statement be prepared using the direct method of reporting. The proposed standard also varies from current guidance with other substantial differences, such as classification of purchases and sales of long-lived assets as an operating, rather than an investing, cash flow. Payments of interest would be financing cash flows rather than operating cash flows, as under current guidance. Cash flows from receipts of interest and dividends on loans and investments would be shown as investing cash flows rather than operating cash flows. The exposure draft also suggests other modifications to the classification of cash flows.
Finally, FASB is proposing additional, enhanced disclosures with respect to the financial statements, including qualitative and quantitative information about period-end balances of board-designated net assets without donor restrictions. Information regarding management of liquidity and other quantitative information as of the reporting date would also be required.
While this is still an exposure draft, its proposed changes should be considered by all affected organizations. A final standard is currently expected in the second quarter of 2016.
If you have any additional questions, contact the expert listed below at PYA, (800) 270-9629.