KatzAbosch’s Response to the Top Five Changes Proposed by FASB for Nonprofits

On April 22, 2015, the Financial Accounting Standards Board (FASB) released an exposure draft titled, “Presentation of Financial Statements of Not-For-Profit Entities.” The stated objective of the proposed accounting standards update was to improve the current net asset classification requirements and information presented in financial statements and notes about a not-for-profit entity’s liquidity, financial performance, and cash flows.

The “Top Five” major changes proposed by the FASB include:

  1. Reducing the number of classifications of net assets from three (unrestricted, temporarily restricted, and permanently restricted) to two (net assets with donor restrictions, net assets without donor restrictions).
  2. Requiring the statement of activities to include two intermediate subtotals to measure changes in net assets from operations.
  3. Using the direct method of reporting for operating cash flows, and clarified where certain cash flows should be included on the statement of cash flows (operating, investing, or financing activities).
  4. Making the requirement to present expenses on their functional basis apply to all not-for-profit entities: either on the face of the statement of activities, in a separate statement, or in the notes to the financial statements.
  5. Enhancing disclosures related to governing board designations and appropriations, composition of net assets with donor restrictions and how the restrictions affect the use of resources, liquidity, cost allocation methods, and underwater endowment funds.

KatzAbosch recently assembled the leadership of its not-for-profit niche (Clem Mueller, Tim Redmond and Amy Nelson), to respond to the FASB exposure draft. KatzAbosch’s response to the “Top Five” changes can be summarized as follows:

  1. AGREE – Reducing the number of classifications simplifies the financial statements, and by renaming the classifications, users will be able to more clearly understand the source of the restriction (the donor).
  2. DISAGREE – The definition of “operations” is somewhat subjective for not-for-profits, and the FASB’s proposed methods for calculating the results from operations seem to only add significant accounting complexity to the financial statements, while providing little benefit to users.
  3. AGREE – Under this method of presentation, users will more clearly see where operating cash inflows are generated and where operating cash outflows are spent.
  4. AGREE – We agree with the FASB in adding consistency to the financial statements by making this requirement applicable to all not-for-profits.
  5. AGREE – The user should get further explanation on what donor restrictions relate to, how expenses were allocated by functional category, etc.

Katz Abosch will provide additional summaries once a final change is enacted, as is it possible additional revisions will be made. Please direct questions related to this topic to Tim Redmond at tredmond@katzabosch.com.

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