Upcoming Changes to Not-for-Profit Accounting

Those who prepare not-for-profit financial statements face significant changes, thanks to a new guidance proposed in April of 2015 by FASB. Practitioners have until August 20 to comment.

The changes are intended to improve the information provided in not-for-profit financial statements and notes to financial statements. It’s been 20 years since not-for-profit statements have had changes of this magnitude.

“We believe that these changes will refresh the model in ways that will make not-for-profit financial statements even more useful to donors, lenders, and other users,” stated FASB member Lawrence W. Smith.

The document outlines the FASB’s proposed improvements to current net asset classification requirements and information presented in financial statements and notes to financial statements about a not-for-profit organization’s liquidity, financial performance, and cash flows.

Specifically, they are intended to:

  • Better reflect financial performance in the statement of activities by showing—in two measures of operating performance—available amounts that have been generated by or directed at carrying out the mission of a not-for-profit in the current period, both before and after any governing board actions affecting that availability.
  • Simplify the existing net asset classification scheme along with enhanced note disclosures.
  • Enhance information in the notes to help financial statement users better assess a not-for-profit’s liquidity and how it is being managed.
  • Make information about expenses more comparable and useful by requiring that all operating expenses be reported by both function and nature and investment return be reported net of related expenses.
  • Make the statement of cash flows more understandable by (a) presenting cash flows provided by operating activities using the direct method of reporting, rather than the indirect (reconciliation) method, and (b) classifying cash flows in ways that are more consistent with classifications in the statement of activities.

The FASB first undertook this project in 2011 based on input provided by its Not-for-Profit Advisory Committee (NAC) and other stakeholders. The NAC members said they believed that, while sound, existing standards for financial statements of not-for-profit organizations could be updated and improved to provide better information to donors, creditors and others*.

For more information on the summary of decisions made to date (April 7, 2015), click here.

* Source: www.ohiocpa.com