What you need to know about the FASB’s Exposure Draft

Presentation of Financial Statements of Not-for-Profit Entities

Jeremy Veilleux, Audit Principal
June 2015

Today, non-governmental entities largely share a common reporting framework. However, the FASB has developed a new proposed framework for financial reporting based on “operating,” “investing” and “financing” classifications of activities, and intends to pilot this new framework with not-for-profit organizations. Here are some key concepts you should understand relative to the FASB’s exposure draft.

Not-for-profit entities currently utilize an operating classification in their performance statement that is based on management’s views of whether the activity is “ongoing, major and central” to the entity’s operations. The FASB’s proposal includes a stricter definition of what is deemed operating or nonoperating based on two new concepts: mission and availability. The FASB’s mission concept probes whether resources resulted from or are directed at the purpose for which the entity exists. As such, generic investing and financing activities would likely be excluded from operations, while property and equipment activity and contributions revenue would typically meet the mission criteria. The FASB’s availability concept considers whether resources are available for current period activities, based on the presence or absence of limitations imposed by donor-restricted contributions or by actions of an entity’s governing board or management. Under this concept, any resources that are converted into long-lived assets that will be used up over future periods are not deemed available for use in current operations.

A key reporting change created by the FASB’s exposure draft will be that limitations imposed by an entity’s board (e.g. board designations) may be reflected as transactions in the operating statement using a new “transfers” category. The transfers category will give rise to two defined operating measures reported before nonoperating activities: operating excess before transfers and operating excess after transfers. The FASB would require that discontinued operations be reported as a component of operating excess before transfers.

Under the FASB’s proposed new model, a simplified statement of activities may be formatted as follows:

NFP Health Care, Inc.
Consolidated Statement of Operations
OPERATING ACTIVITIES
Revenue:
Net patient service revenue $xxx
Contributions xxx
Net assets released from restriction for PP&E xxx
Equity transfers from affiliate xxx
Expenses:
Salaries and benefits xxx
Depreciation xxx
Other xxx
Operating excess, before transfers xxx
Transfers to nonoperating activities:
Net assets released from restriction for PP&E (xxx)
Operating excess, after transfers xxx
NONOPERATING ACTIVITIES
Investment income, net xxx
Derivative gains xxx
Interest expense (xxx)
Transfers from operating activities:
Net assets released from restriction for PP&E xxx
Change in net assets without donor restrictions $xxx

The FASB’s goal seems to be to better align operating activity in the statements of activities and cash flows. Therefore, most or all investing and financing activity in the statement of cash flows will correspond with nonoperating activities in the statement of activities.

Other proposed changes include reducing the three net asset classifications to two (with and without donor restrictions), and enhancing required liquidity disclosures.

Comments on the FASB’s exposure draft are due by August 20, 2015. On June 22, 2015, BNN will provide a webinar discussing some of the concepts addressed above. Click here to sign up for the webinar.