A change in financial presentation is coming for all non-profits. While the details open for comment, generally the sentiment of the change will be related to how non-profits present information on their financial statements.
In April, 2015, The Financial Accounting Standards Board (FASB), the organization that establishes financial accounting and reporting standards, issued an exposure draft of its proposed changes and is requesting comments by August 20, 2015 from the public. A final pronouncement of changes will likely be issued about six months later and could potentially go into effect for years ending after December 15, 2016.
The goal of the changes proposed by FASB is to simplify and organize the information presented in a non-profit financial statement to be more meaningful to readers. The statement of position, statement of activities, and the statement of cash flows are in discussions for changes. Non-profit statements of position currently report three classes of assets; unrestricted, temporarily restricted, and permanently restricted. Under the new guidelines, there would be two classes of assets; without donor restriction, and with donor restriction. Financial statement disclosures would then provide a detailed explanation of the restrictions which will not vary significantly from current practice.. Organizations will still hold the responsibility of spending restricted funds appropriately.
Non-profit statements of activities will be organized into operating and non-operating activities. Operating activities will include such line items as sponsorships, donations, and event income. Non-operating activities will include investment income such as interest, capital gains, and dividends. This will give the readers a clearer sense of the operating health of the organization.
Additionally, the proposal would require non-profit cash flow statements to be prepared using the direct method. To better match the statement of activities, acquisition of property and equipment would be reported as an operating activity, and dividends and interest would be reported as an investing activity.
The main driver in the proposal is the new conceptual approach of defining what is to be classified as operating or non-operating. A defined subtotal for operating activity on the statement of activity would be required. The proposed exposure draft defines the operating classification to be determined with a focus on the organization’s mission. For example, if property and equipment is critical to carrying out the organization’s mission, then activities associated with capital assets would be reported as operating. Investment income not arising from core programs would not meet the mission definition and would be considered non-operating.
In the opinion of Paul Ford, Shareholder, Samet & Company, PC, these proposed changes are an attempt by the FASB to focus on developing an operating metric for non-profit organizations.
Read on for visual examples of the new statement of position, statement of activities, and statement of cash flow according to the proposed FASB Standards Update.
Source: Page 60 of FASB Exposure Draft Proposed Accounting Standards Update Issued April 20, 2015. Not-for-profit Entities (Topic 958) and Health Care Entities (Topic 954)
Source: Page 64 of FASB Exposure Draft Proposed Accounting Standards Update Issued April 20, 2015. Not-for-profit Entities (Topic 958) and Health Care Entities (Topic 954)
Source: Page 70 of FASB Exposure Draft Proposed Accounting Standards Update Issued April 20, 2015. Not-for-profit Entities (Topic 958) and Health Care Entities (Topic 954)
We will update our site with additional resources as the FASB process continues. If you have questions about what is presented here or what changes may be coming, please contact Paul Ford, Shareholder, Samet & Company.