Volunteer for a Not-for-Profit? Big Changes Coming Your Way!

Many of us are involved with not-for-profits in some capacity, either because you work for a not-for-profit or volunteer for one in a leadership role. The Financial Accounting Standards Board (FASB) is on the verge of proposing significant changes in the way not-for-profit financial statements are presented. The goal of the FASB project is to improve net asset classification requirements and provides information about liquidity, financial performance and cash flows. FASB will roll out its plan mid-April and will accept comments through July 31. Because of the nature of the changes, it is expected that a wide range of not-for-profits will be impacted.

Statement of Activities

To address financial performance, FASB’s proposal includes the requirement to present in the statement of activities an intermediate measure of current operations that is defined on the basis of two dimensions: mission and availability. Mission would be those items that result from or are used in carrying out the not-for-profit’s exempt purpose. Availability would be those items that are available for current operations, thus excluding items that have use or time limitations imposed by donors or the board of directors. Net assets released from restrictions and board designations of current net assets would be shown as transfers in and out of operations in a section separate from operations. For example, an unrestricted bequest would initially be reported as operating revenue. However, if the board designated the bequest to be invested in a quasi-endowment, then that same bequest would be shown as a transfer out of current operations. There will be an option of either a one or two statement approach to presenting all of the revenues, expenses, gains, losses and other events that change net assets. Not-for-profits will be permitted, but not required to present the intermediate measure of operations in the same statement that also reports the change in unrestricted net assets for the period.

FASB is also recommending a change from three net asset classes to two net asset classes. Under the proposal, net assets would be presented as those with donor-imposed restrictions and those without donor imposed restrictions, thus removing the distinction between permanently and temporarily restricted net assets. Instead, disclosures would provide clarity about when and how net assets can be used.

Organizations would have the option of a one or two statement approach to presenting the results from operations and changes in each net asset class.

Statement of Functional Expenses

Voluntary Health and Welfare organizations will no longer be required to present a separate statement of functional expenses. FASB is proposing that all not-for-profit organizations provide an analysis of expenses by nature and function in one location. However, that location and format will be flexible whether included in the notes or the face of the financial statements. In addition, the board plans to refine the definition of management and general activities and provide better guidance regarding how costs should be allocated among program and overhead functions.

Statement of Cash Flows

The direct method cash flow statement is in (required) and the indirect method is out. In addition, the indirect method reconciliation of cash flows from operating activities will no longer be required. Forget everything you thought you knew about cash flow categories. FASB is proposing to move items around to align with its proposed changes to the statement of activities. Cash gifts, payments and proceeds related to fixed assets used for operating purposes would move from investing to operations. Dividends and interest would move from operating to investing. Cash paid for interest would move from operating to financing.

Note Disclosures

FASB suggests disclosures that provide information about a not-for-profit’s liquidity, including the total amount of financial assets, those assets that are not available to meet cash needs within the not-for-profit’s time horizon and the total amount of financial liabilities that are due within that same time horizon. Each not-for-profit will be able define their own unique time horizon, as each may be different. For example, a university’s time horizon might be a semester.

We will provide more information once the exposure draft is issued. In the meantime, you can find more information at: Financial Statements of Not-for-Profit Entities Tentative Board Decisions Reached to Date