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Not-For-Profit Financial Statements Proposal Set for April Release

The FASB plans to issue in April the first major change to not-for-profit accounting in two decades. The board wants the accounting amendments to give donors, regulators, watchdogs, and creditors better information about how universities, charities, museums, and other groups spend and invest their money.

The FASB expects to release for public comment in mid-April a wide-ranging proposal to overhaul how charities, universities, museums, and other not-for-profit organizations convey their financial information to donors and regulators.

The FASB voted on February 25, 2015, to give the public until the end of July to submit comments.

The proposal is expected to represent the most significant changes to not-for-profit accounting since 1993, when SFAS No. 116, Accounting for Contributions Received and Contributions Made, (FASB ASC 958), and SFAS No. 117, Financial Statements of Not-for-Profit Organizations, were published.

In recent years, not-for-profit groups have been pressuring the FASB to help them better tell their “financial story.” The forthcoming proposal is expected to make financial statements more transparent with its requirements for classifying assets and providing information about access to cash, financial performance, and cash flows.

FASB Vice Chairman James Kroeker said he planned to dissent, even though there are parts of the proposal that he said would represent an improvement to financial reporting. His dissent will be based on the FASB’s proposed changes to the statement of cash flow items and on the proposed requirement that not-for-profit groups use the direct method of presentation, which calls for the separate reporting of cash receipts and payments tied to operating activities.

Most not-for-profit groups use the indirect method of presentation, which starts with net income, adjusts for all noncash transactions, and then makes a second adjustment for cash-based transactions. The FASB heard, however, that this method doesn’t provide enough useful information. The board instead wants all groups to use the direct method.

“I have questions in my mind about the benefits of allowing transfers on a statement of performance as opposed to the alternative in the income statement,” Kroeker said.

FASB Chairman Russell Golden didn’t say he would dissent, but expressed disappointment with the proposal’s content.

“I wish we had made fewer differences between for-profits and not-for-profits,” Golden said. “I wish the end result would have been that… the differences are incremental or specifically unique to that of a not-for-profit. I recognize that’s clearly not what we’re doing in the statement of cash flows.”

The accounting board didn’t decide on the standard’s effective date if the amendments become final. Board members said they wanted to hear from organizations about how much time they would need to adopt the new accounting. The board does want organizations to follow retrospective application when the new accounting is adopted, which means the new accounting would have to applied to previous financial results to let donors, regulators, and other constituents accurately compare financial performance from one period to the next.

The FASB plans to gather more information when it meets with its Not-for-Profit Advisory Council on March 3.

A significant part of the February 25 meeting was spent discussing comments from external reviewers of a preliminary version of the upcoming proposal that the FASB hasn’t provided a uniform definition of “operating activities” in the proposal. “Operating activities” are defined for the purpose of the statement of activities, but not for the cash flow statement.

The inconsistency confused some external reviewers, who asked the FASB whether purchases of long-lived assets might be used for uses other than carrying out an organization’s central mission and, if so, whether they shouldn’t be classified as operating cash flows.

A divided board decided not to give a further explanation but instead ask questions in the proposal about whether the definitions should be better aligned.

“I’m not going to jump up and down if we go the question route, but it has to be a little more clear than, ‘Yes, we recognize this is conflict,'” FASB member Harold Schroeder said. “Clearly, writing this, we see this conflict, what are your views, here are pros and cons. It’s going to require a little bit more discussion.”

The board also wrapped up several smaller decisions for the project.

Organizations wouldn’t have to separately disclose unrelated business income taxes or excises taxes. The board also decided to eliminate requirements for disclosures of components of investment return and the total performance of other investment portfolios, which colleges and universities currently disclose.

The board also decided that several items should be reported separately from revenues, expenses, gains, and losses and presented within the operating activity section of the statement of activities. The items are the immediate write-off of goodwill upon acquisition of an entity; acquisitions and disposals of noncapitalized collection items purchased with money that isn’t restricted by a donor; and equity transfers.

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