The Financial Accounting Standards Board (FASB) released an update on the April 2015 proposed Accounting Standards Update (ASU) No. 2015-230, Not-for-Profit Entities (Topic 958) and Health Care Entities (Topic 954): Presentation of Financial Statements of Not-for-Profit Entities that received significant support from the non-for-profit (NFP) community. The update postponed work on some of the more controversial aspects of ASU No. 2015-230.
Phase 1 will focus on parts of the proposal that received the most support.
The areas included:
Requiring of Two Classes of Net Assets: NFP entities have long had three classes of net assets. This requirement reduces that number down to two.
- Unrestricted net assets would be renamed net assets without donor restrictions.
- “Temporarily” and “Permanently” net assets would be combined into net assets with donor restrictions.
- Consistent with generally accepted accounting principles (GAAP), NFPs will continue to provide relevant information about the nature and amounts of donor restrictions on net assets. This information can either be on the face of the statement of financial position or in the notes to the financial statements.
- NFPs will be required to disclose the amounts and purposes of the board-designated net assets either on the face of the statement of financial position or in the notes to the financial statements.
Classification and disclosure of Endowments: FASB affirmed the requirement for endowment funds that are underwater to be classified as part of net assets with donor restrictions rather than net assets without donor restrictions. Further, NFPs would be required to disclose the following information for those endowment funds which are underwater:
- The entity’s policy to either reduce expenditure or not spend from underwater endowment funds.
- The aggregate fair value.
- The aggregate original endowment gift amount or level required by donor stipulations or by law to be maintained.
- The aggregate of the amount of the deficiencies.
Acquisition or Construction of Long-Lived Assets: FASB affirmed its proposal, in the absence of explicit donor restrictions, that NFPs would be required to reclassify net assets with donor restrictions that are for the acquisition or construction of long-lived assets as net assets without donor restrictions when the long-lived asset is placed in service. This eliminates the over-time approach.
Phase 2 will focus on the more controversial aspects in the proposal that will require more time from the standard setters.
Such areas include:
- Methods of Presenting Operating Cash Flows: FASB has decided not to require NFPs to use the direct method of presenting operating cash flows, NFPS will be able to continue to use either the indirect or direct method. Also, NFPs will no longer require the indirect reconciliation if a NFP chooses to use the direct method.
- Information Useful in Assessing Liquidity: The FASB is further evaluating if it is more beneficial to require qualitative and quantitative information of operations for all NFPs that would assess the NFPs liquidity. Further, how to define such information and what items should or should not be included in the qualitative and quantitative information.
Tentative Board decisions are provided for those interested in following the Board’s deliberations. All of the reported decisions are tentative and may be changed at future Board meetings.
While these changes are tentative, their passing could result in the need to change several areas of financial reporting and financial statement presentation for NFPs. We will continue to monitor developments.