The Financial Accounting Standards Board (FASB), which establishes financial accounting and reporting standards in the U.S., has proposed significant changes to not-for-profit (NFP) reporting guidelines. While not yet approved, these new rules would represent the biggest impact on the way non-profit groups perform their financial reporting responsibilities since FASB statements in 1993.
FASB’s Not-For-Profit Advisory Committee has sought ways to make NFPs more comparable to each other through financial reporting. The changes are also intended to give donors and lenders a clearer picture of liquidity so as to better assess the financial health of the not-for-profit.
The proposed changes include:
- NFPs would have to report all expenses by nature and function, something that currently only applies to health and welfare organizations.
- Requiring a net presentation of investment expenses against investment return on the statement of activities, including internal salary and benefit expenses. External investment expenses netted against returns would no longer have to be disclosed.
- NFPs must present two intermediate operating measures as defined by the dimensions of mission and availability. Mission refers to the group’s reason for existence, while availability on resources available for current-period activities.
- The requirement to use the placed-in-service approach for the treatment of expiring restrictions on long-lived assets, thereby eliminating the possibility of releasing the donor-imposed restriction over an asset’s estimated useful life.
- The current net asset classes of permanently restricted, temporarily restricted and unrestricted would be simplified into two classes: assets with donor restrictions and assets without restrictions.
- Endowment funds that are currently underwater would be placed in the “with donor restrictions” class of net assets. The NFP would additionally be required to provide disclosures about the original gift amount, current fair market value and organizational spending policies.
- Reporting cash flows for operating activities would now require the direct method, replacing the existing indirect method.
- NFPs must provide quantitative and qualitative information for assessing liquidity, including a description of the time horizon used to manage its liquidity.
The FASB is accepting comments on the proposal through Aug. 20. If you have any concerns about these new rules, we would be happy to consult with you and assist in directing your concerns to the FASB.
If you have any questions about financial reporting for not-for-profit organizations, contact Lisa Blankman at (317) 613-7856 or email [email protected].