On December 11, 2015 the FASB met to discuss certain topics of the proposed FASB Accounting Standards Update, Not-for-Profit Entities (Topic 958) and Health Care Entities (Topic 954): Presentation of Financial Statements of Not-for-Profit Entities. Certain topics still need further discussion, however; the following aspects of the proposal were affirmed and will likely revise existing standards later in 2016:
- NFPs will not be required to use the direct method of presenting their operating cash flows. NFPs can continue to use either the direct or indirect method, whichever they chose. If NFPs decide to use the direct method, they will not be required to perform an indirect reconciliation. The indirect method is much easier to implement, and is the de facto standard in the industry as of now.
- Net assets will likely be reported in two different categories. Temporarily and permanently restricted net assets would be combined into one category “net assets with donor restrictions.” Unrestricted net assets would be labeled as “net assets without donor restrictions.” The current GAAP requirement to provide information about the nature and amounts of donor restrictions would still be required for NFPs. under the proposed guidance. The impact of this change does not seem significant.
- NFPs would be required to disclose the amounts and purposes of board-designated net assets either on the face of the financials or in the notes. Good accountants are already doing this.
- For endowment funds that are “underwater,” the FASB confirmed its proposal to require that the aggregate amount by which endowment funds are underwater be classified within net assets with donor restrictions.
- In addition, for endowment funds that are underwater the FASB affirmed its proposal to require enhanced disclosures. The FASB proposal includes the elimination of the NFP’s choice to choose between two different methods for accounting for expirations of restrictions for capital assets. The placed-in-service approach would be applied and the over-time approach would be removed. Therefore, they would be accounted for when they occur and not over time.
There are two phases of the proposed update that includes various topics. The topics outlined above are part of phase one. The FASB predicts that phase one might be completed and issued around mid-summer of 2016.
The next meeting of the FASB on the proposed update is currently scheduled to be held January 2016. At this meeting, the FASB plans on discussing other topics that are included in phase one.
We’ll keep you updated as the proposal gets closer to becoming reality. At this point, no action is required, and most changes seem to be informational-only.
Kenneth R. Cerini, CPA, CFP, FABFA
Ken is the Managing Partner of Cerini & Associates, LLP and is the executive responsible for the administration of our not-for-profit and educational provider practice groups. In addition to his extensive audit experience, Ken has been directly involved in providing consulting services for nonprofits and educational facilities of all sizes throughout New York State in such areas as cost reporting, financial analysis, Medicaid compliance, government audit representation, rate maximization, board training, budgeting and forecasting, and more.