Proposed Reporting Standards for Not-For-Profit and Healthcare Entities
(A Review of Topics 954 and 958)
Dylan Moulton, Audit Senior
On April 22, 2015, the Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update (ASU) that may affect both Not-For-Profit Entities (Topic 958) and Health Care Entities (Topic 954). These proposed changes are intended to improve the usefulness of the financial statements, while reducing the complexity and cost for preparers and users.
Included in the proposed provisions are the following eight requirements and changes:
- Net assets will be required to be presented on the face of the financial statements in two classes: net assets with donor restrictions and net assets without donor restrictions. This will be a change from the current presentation which requires net assets to be broken out into three categories: unrestricted, temporarily restricted, and permanently restricted. This proposed change is designed to eliminate the confusion of how donor imposed restrictions affect an entity’s liquidity and performance.
- The statement of activities will be modified to show the change in each of the two new net asset classes mentioned above rather than the previously required three classes.
- Two additional subtotals relating to changes in net assets without donor restriction will be required on the statement of activities:
- Operating Activities: operating revenues, support, expenses, gains, and losses without donor-imposed restrictions and before internal transfers.
- Other Activities: effects of internal transfers resulting from 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.
- The statement of cash flows will be required to show the net amount for operating cash flows using the direct method of reporting. Not-for-profits currently are allowed to use either the direct or indirect method when preparing the statement of cash flows. FASB believes the direct method of presenting operating cash flows is more understandable and useful than the indirect method.
- Classification of cash flows will change as follows:
- Cash flows resulting from purchases of long-lived assets, contributions restricted to acquire long-lived assets, and sales of long-lived assets will be reclassified from investing cash flows to operating cash flows.
- Cash flows resulting from payments of interest on borrowings, including cash management activities, will be reclassified from operating cash flows to financing cash flows.
- Cash flows resulting from receipts of interest and dividends on loans and investments, other than those made for programmatic purposes, will be reclassified from operating cash flows to investing cash flows.
- The ASU calls for enhanced disclosures regarding:
- Self-imposed restrictions,
- The impact of donor imposed restrictions on the use of resources,
- Financial assets available to meet near-term demands for cash,
- Additional disclosures of operating expenses by both their nature and function,
- Methods used to assign costs amongst programs and support functions, and
- Underwater endowment funds.
- The placed-in-service approach for reporting expirations of restrictions of cash used to acquire or construct long-lived assets will be required. The current standards allow the option to release the donor-imposed restriction over the estimated useful life of the acquired asset.
- Investment income will be reported net of external and direct internal investment expenses.
If enacted, the proposed update will affect Not-for-profit entities. Those entities typically receive substantial contributed resources and operate to further a public purpose rather than achieve a profit objective. This would typically include charities, foundations, private colleges and universities, nongovernmental health care providers, cultural institutions, religious organizations, and trade associations and additional entities.
The effective date of these proposed changes has yet to be established and will be determined after FASB reviews stakeholders’ feedback on the proposal. Comments regarding this proposal are due to FASB by August 20, 2015 and can be completed by using FASB’s Electronic Feedback Form found on their website.
If you would like to discuss further, please call your BNN service provider at 1.800.244.7444.
Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.