By Carla DeMartini, CPA
The Financial Accounting Standards Board (FASB) issued the proposed Accounting Standards Update (ASU) Presentation of Financial Statements of Not-for-Profit Entities to provide improvements to the not-for-profit (NFP) financial statement presentation. The proposed changes are the first significant ones to NFP financial statements in over 20 years. The public comment period on the exposure draft ended on Aug. 20, during which time BDO and approximately 260 other entities issued comment letters relative to the proposed changes.
As part of the FASB’s outreach efforts, FASB members and staff held a series of roundtables — on the East Coast on Sept. 21 and on the West Coast on Oct. 7 — to enhance their understanding of the views expressed in the comment letters and to hear possible alternatives from the NFP sector. The BDO team members attended the East Coast roundtable meeting alongside representatives from NFP organizations from different parts of the sector, public accounting firms, creditors and other NFP financial statement users.
The discussion centered mainly on the proposed topics of operating measures, presentation of cash flows and information used in assessing an NFP’s liquidity. There was also limited discussion held on functional expenses, investment return and the changes in classes of net assets presented.
The discussion on operating measures, which included many conflicting opinions among participants, far exceeded the length of time spent on any other topic. The discussion centered on the proposed changes to the statement of activities that requires two intermediate measures of operations. The first measure would define operations based on the mission and availability dimension, whereas the second measure would define how an entity manages its resources through board policy. Much discussion ensued on the assumption that NFPs are all so diverse that this presentation would not serve a useful purpose for all NFP entities. A format that may best represent a social service agency, for example, may not properly reflect the nature of operations of a private foundation. Additionally, there was some disagreement with regard to separating quasi endowments from true endowments. Some NFPs believe that it would be confusing to the readers to split these amounts since the endowment is managed as one pool. Another common thought expressed among many of the participants was that although the additional board designated transfers would be important enough to warrant language in the footnotes regarding policies and board decisions, it would confuse readers if presented on the face of the financial statements. It was evident from the strong reactions that the FASB may need to further consider how to depict board designated transfers. One participant suggested having NFPs mirror for-profits by dividing the statement of activities into two schedules: the statement of activities and the statement of net assets, which is allowed under the proposed ASU. The statement of net assets can summarize what has impacted the entity during that period and can reflect decisions made by the board about the approach taken during the year.
The discussion related to the presentation of cash flow statements focused on the purpose and use of the statement and whether the direct method should be required or just encouraged. The popular opinion seemed to be that although the initial year of converting to the direct method could prove to be complicated, it would become manageable in subsequent years and, in many instances, provide significant benefit to the reader. However, some organizations seemed to prefer the flexibility to choose either the direct or indirect method. Additional feedback indicated that reactions were mixed regarding the requirement of an indirect cash flow reconciliation in the footnotes should the direct method be adopted in the cash flow statement. Although the reconciliation may be useful for internal purposes, such as communication of an activity to those charged with governance, most felt that providing both cash flow presentations would be unnecessary and would not provide value to readers of the financial statements.
Assessment of Liquidity
Most of the participants were in agreement that disclosing information about liquidity would be useful, which was not surprising, considering the direction the NFP sector has taken toward a more transparent environment. It was noted that several federal and state funding agencies are now requesting liquidity ratios or stability ratios to determine viability before awarding funding. The discussion centered on current reporting practices, which do not require NFPs to make evident how restrictions or designations may affect their liquidity. It was also noted that making liquidity more transparent through required disclosures about the availability of resources would help the reader of NFP financial statements. Additionally, requiring qualitative disclosures, such as outlining restrictions placed by donors or designations by the board, would further clarify how an NFP manages its liquidity. An interesting discussion was also held on the value of the trend-line in relation to the staleness of information argument. In other words, although looking at trends is useful in providing comparable information among an NFP’s peer group, this data may be stale and therefore, not valuable, by the time the financial statements are issued.
Additional Discussion Points
The participants also discussed the proposed disclosures related to functional expenses and investment return, as well as the proposed changes in classes of net assets. Most participants were in agreement with the changes in these areas and believed that the revisions would assist in providing useful and relevant information.
In conclusion, the proposed ASU was drafted to improve the presentation of NFPs’ financial statements and to provide useful and more transparent information to the reader of the financial statements. However, a common viewpoint is that although comparability may be improved, complexity may also increase. The FASB members reviewed the comments brought forward from the roundtables and outreach efforts, along with the comment letters on the proposed ASU, to determine the next steps for this project. See the next article for an update on the plan.
Article adapted from the BDO Nonprofit Standard blog.
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This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Winter 2015). Copyright © 2015 BDO USA, LLP. All rights reserved. www.bdo.com