FASB Proposal May Mean Big Changes to Not-for-Profit Reportingby
As the Aug. 20 deadline for public comments approaches, not-for-profits should take note of potentially big financial reporting changes coming their way. The cornerstone of the Financial Accounting Standards Board's not-for-profit proposal is defining âoperating activities.â
Today, distinguishing operating from nonoperating items requires determining whether activities or transactions are âongoing major or centralâ to a not-for-profit's operations. The proposed standard changes that, requiring instead a determination based on two dimensions: mission and availability.
Mission considers whether resources are from or directed at carrying out the purposes or mission for which the not-for-profit exists. Availability considers whether resources are available for current-period activities, based on the presence or absence of internally- or externally-placed restrictions.
Building on the concept of mission and availability, the proposed rule would also require not-for-profits to present specific subtotals on the statement of activities (operating excess before transfers and operating excess after transfers). This is a novel concept; except for healthcare not-for-profits, not-for-profits currently have flexibility in how they report operating results, if they choose to report an operating measure at all. Now, all not-for-profits, including healthcare not-for-profits, must report these two subtotals.
To further help align the reporting of operating activities and operating cash flows, the proposed standard would require not-for-profits to use the direct method of cash-flow reporting and would change the classification of certain cash flows to be consistent with the operating activities on the statement of activities (e.g., acquisition of property, plant, and equipment would be operating). All not-for-profits would also be required to disclose expenses by both their nature and their function.
Finally, the proposal seeks to simplify reporting on the face of the statement of financial position by reducing the required classes of assets presented from three (permanently restricted, temporarily restricted, and unrestricted) to two (net assets with donor restrictions and net assets without donor restrictions). And, it will require enhanced liquidity disclosures, including information on financial assets that are restricted due to external/internal designations and underwater endowment funds.
As PwC's recent In brief: FASB exposure draft proposes dramatic changes for not-for-profit (NFP) entities explains, the proposed standard requires a different conceptual approach to how not-for-profits present their financial information. Thus, not-for-profits should consider commenting and ready themselves for the major changes on their way.
About the author:
Beth Paul is a partner with the National Professional Services Group at PwC.