FASB Proposes Significant
Changes to NFP Financial Reporting
FASB Proposes Significant Changes to NFP Financial Reporting
Table of Contents
EXECUTIVE SUMMARY ........................................................................................................................................... 3
FINANCIAL STATEMENTS OF NOT-FOR-PROFITS ..................................................................................................... 4
NET ASSET CLASSIFICATION CHANGES ................................................................................................................................4
ENDOWMENT FUNDS ......................................................................................................................................................4
Underwater Endowment Funds ............................................................................................................................4
STATEMENT OF ACTIVITIES .................................................................................................................................... 5
OPERATING MEASURES DEFINED.......................................................................................................................................5
Acquired Collection Items Not Capitalized ............................................................................................................6
OPERATING EXCESS (DEFICIT) BEFORE TRANSFERS (SUBTOTAL NO. 1)......................................................................................6
OPERATING EXCESS (DEFICIT) AFTER TRANSFERS (SUBTOTAL NO. 2)........................................................................................6
ONE-STATEMENT OR TWO-STATEMENT APPROACH ..............................................................................................................7
GIFTS OF LONG-LIVED ASSETS & CASH TO ACQUIRE LONG-LIVED ASSETS..................................................................................7
Gifts of Long-Lived Assets Without Donor-Imposed Restrictions ..........................................................................7
Gifts of & Contributions to Purchase Long-Lived Assets with Donor-Imposed Restrictions ..................................7
ILLUSTRATED PROPOSED NFP STATEMENT OF ACTIVITIES.......................................................................................................8
ILLUSTRATED PROPOSED NFP STATEMENT OF ACTIVITIES FOR A HEALTH CARE ENTITY.................................................................9
ILLUSTRATED PROPOSED NFP STATEMENT OF ACTIVITIES FOR A UNIVERSITY............................................................................10
FUNCTIONAL & NATURAL EXPENSE CLASSIFICATIONS & COST ALLOCATION .............................................................................12
Voluntary Health & Welfare Organizations ........................................................................................................12
NET INVESTMENT INCOME .............................................................................................................................................12
STATEMENT OF CASH FLOWS............................................................................................................................... 13
DIRECT METHOD..........................................................................................................................................................13
CLASSIFICATION CHANGES..............................................................................................................................................13
Business Combinations........................................................................................................................................13
ILLUSTRATED PROPOSED NFP STATEMENT OF CASH FLOWS .................................................................................................14
DISCLOSURES ....................................................................................................................................................... 15
SUMMARY OF NEW & CLARIFIED DISCLOSURES ..................................................................................................................16
TRANSITION GUIDANCE ....................................................................................................................................... 17
CONTRIBUTOR ..................................................................................................................................................... 17
2
FASB Proposes Significant Changes to NFP Financial Reporting
Executive Summary
On April 22, 2015, the Financial Accounting Standards Board (FASB) issued a proposal that could result in
significant changes to not-for-profit financial reporting. The proposed Accounting Standards Update (ASU), Notfor-Profit Entities (Topic 958) and Health Care Entities (Topic 954): Presentation of Financial Statements of Not-forProfit Entities, would change several requirements for financial statement presentation and notes of all not-forprofit (NFP) entities, including certain requirements for NFP health care organizations. FASB encourages NFPs and
vested stakeholders to review and comment on the proposal by August 20, 2015.
The proposed standard would represent the most significant changes in NFP reporting rules since 1993, when FASB
issued Statement No. 116 and Statement No. 117. FASB proposes significant changes to the fundamental
reporting model, intended to provide intuitive financial and liquidity information to donors, grantors, lenders and
other users of NFP financial statements. Proposed changes include:

The NFP statement of financial position would distinguish between two new classes of net assets—those
with donor-imposed restrictions and those without—replacing the existing three classes of net assets.
The proposal retains the current requirements to provide information on the nature and amount of
different types of donor restrictions in the notes to the financial statements.

The statement of activities would include a new standardized operating measure, requiring NFPs to
classify all revenues and expenses without donor restrictions as an operating or nonoperating activity.
Within the operating activities associated with changes in net assets without donor restrictions, the
statement would include two new measures of operating performance presented as subtotals. The first
subtotal would present operating activities before internal transfers. The second subtotal would include
self-imposed limitations that mark otherwise currently available amounts as unavailable, and vice versa,
in a way that discloses resources available for use in the current period. The “performance indicators”
currently required of business-oriented health care NFPs would now be optional. Donor-restricted
activities would be presented separately from the operating and nonoperating activities.

The proposal would require NFPs to report expenses by both nature and function in one location in the
financial statements—either on the face of the statement of activities, as a separate statement or within
the notes to the financial statements. Voluntary health and welfare organizations no longer would be
required to provide a statement of functional expenses; they instead would have the presentation options
available to all NFPs.

The proposal requires NFPs to use the placed-in-service approach for reporting expirations of restrictions
on gifts of cash or other assets to be used to acquire or construct long-lived assets. This eliminates the
option to release the donor-imposed restriction over the estimated useful life of the acquired asset,
unless the asset is further restricted by the donor after acquisition.

An NFP would report investment income net of external and direct internal investment expenses on the
statement of activities; it no longer would be required to disclose the amount of investment expenses
netted against investment returns, other than the amount of internal direct costs of salaries and benefits.

Regarding the statement of cash flows, NFPs will be required to use the direct method versus the indirect
method, providing increased congruency with the redesigned statement of activities. In addition, FASB
proposes reclassifying certain items reported in the cash flows statement to better align them with the
ASU’s proposed notion that operating activities reported in the statement of activities should be based on
whether “resource inflows and outflows are from or directed at carrying out an NFP’s purpose for
existence.”

FASB proposes new and enhanced quantitative and qualitative disclosures to provide additional
information meant to be useful in assessing an NFP’s liquidity and cash flow; these disclosures would
include a description of the time horizon used to manage the NFP’s liquidity and near-term availability
and demands for cash as of the reporting date.
3
FASB Proposes Significant Changes to NFP Financial Reporting
The proposed amendments would be applied on a retrospective basis. FASB will determine the effective date and
whether it should be the same for all NFPs, as well as whether early adoption would be permitted, after
considering stakeholder feedback.
Financial Statements of Not-for-Profits
Net Asset Classification Changes
FASB proposes replacing the existing three classes of net assets (unrestricted, temporarily restricted and
permanently restricted classifications) with two net asset classes: with donor restrictions and without donor
restrictions. This eliminates the requirement for NFPs to designate donor restrictions as temporarily restricted or
permanently restricted on the face of the financial statements. NFPs instead would be required to disclose the
nature and amount of donor restrictions, including how and when they can use these funds in the notes to the
financial statements.
On the face of the statement of financial position, NFPs would report a total for each of the two net asset classes,
as well as the currently required amount for total net assets. Likewise, on the face of the statement of activities,
NFPs would report the amount of change in each of the two classes of net assets and, as currently required, report
the amount of the change in total net assets for the period.
Net Asset Classifications – Current GAAP
Unrestricted Net Assets
Temporarily Restricted
Net Assets
Permanently Restricted
Net Assets
Net Asset Classifications – Proposed GAAP
Net Assets Without Donor Restrictions
New Disclosure Requirement: Amount, purpose and
type of board designations for net assets without
donor-imposed (internally imposed) restrictions
Net Assets with Donor Restrictions
Maintained Disclosure Requirement: Nature and
amount of donor restrictions
Endowment Funds
The proposal includes clarified guidance for reporting net assets of endowment funds within the two classes of net
assets, which continues to consider the existence or absence of donor-imposed restrictions.
Underwater Endowment Funds
Endowment funds are established funds composed of cash, securities or other assets to provide income for the
maintenance of an NFP. Assets of the endowment fund may be with or without donor-imposed restrictions. An
underwater endowment fund is a donor-restricted fund where the fair value of the individual fund at the reporting
date is below its original gift amount or another amount the NFP is required to maintain, either by the donor or by
law.
According to existing generally accepted accounting principles (GAAP), an NFP must disaggregate from the donorrestricted endowment fund (and the permanently or temporarily restricted class of net assets) and present within
unrestricted net assets the amounts by which an endowment fund has fallen below its original gift amount. This
reclassification can be confusing for both preparers and users.
To clarify the nature of the transaction, FASB proposes NFPs classify underwater donor-restricted endowment
funds within the proposed “net assets with donor restrictions” class of net assets. To provide enhanced liquidity
information and potential insights into the NFP’s ability to provide services, FASB proposes NFPs provide increased
4
FASB Proposes Significant Changes to NFP Financial Reporting
quantitative and qualitative disclosures about underwater endowment funds. NFPs would disclose their
interpretation of the underlying law, policies and decisions regarding spending from the underwater endowment
funds, including their policy to either reduce expenditures or not spend from underwater endowment funds, and
whether this policy was followed. NFPs would disclose, in the aggregate for all underwater endowment funds, the
original gift amount or amount required to be maintained by the donor or by law, the fair value of the underwater
endowment funds and the total amount of the deficiencies.
Statement of Activities
Operating Measures Defined
Existing GAAP does not define, require or preclude an intermediate operating measure for NFPs, with the
exception of performance indicators required by business-oriented health care entities. This often results in
inconsistent or nonexistent reporting of an operating measure by NFPs. To increase comparability among NFP
entities and present concise liquidity and financial performance information, FASB proposes defining two
intermediate operating measures for all NFPs.
Under the proposal, the statement of activities would report all revenues, expenses, gains, losses and other
changes in net assets without donor-imposed restrictions as either operating or nonoperating activities. NFPs
would present on the face of the statement of activities two operating measures (subtotals) reflecting operating
activities for the period. The first subtotal represents the operating excess (deficit) before internally designated
transfers, but would include the release of donor-restricted resources. The second subtotal represents operating
excess (deficit) after internally designated transfers. All internal transfers—decisions to designate otherwise
available amounts as unavailable or vice versa—would be presented in a discrete section before the operating
measure after transfers subtotal.
Both subtotals would reflect operating activities for the period, distinguished from nonoperating activities and
donor-restricted activity, based on whether the resource inflows and outflows are from or directed at carrying out
an NFP’s purpose for existence and available for current-period operating activities. The subtotals would be
reflected using the following criteria:
1. Mission
Resource inflows and outflows are from or directed at carrying out an NFP’s purpose for existence; investing
and financing activities other than those directed at carrying out an NFP’s programs would not meet the mission
dimension
2. Availability
Resources legally available for current period use; resources restricted by external donors or designated by an
NFP governing board for specific purposes in future periods would not meet the availability dimension
Operating activities include supporting activities, such as supervision, oversight, centralized services, e.g.,
accounting, human resources or purchasing, program development, membership development and fundraising.
Management and general activities are supporting activities not identifiable with one or more programs,
fundraising or membership-development activities. Supporting activities are classified as operating activities
because substantially all NFPs must conduct these activities to carry out their current-period purposes for their
existence. Operating activities also include programmatic investing (investments directed at carrying out the NFP’s
purpose rather than for income), financing and similar activities carried out for the NFP’s purpose, as opposed to
unrelated investing directed at generating investment returns and interest expense related to financing activities
(reported as nonoperating activities).
5
FASB Proposes Significant Changes to NFP Financial Reporting
Mission and availability determine proper classification as operating or nonoperating changes in net assets without
donor restrictions. The operating section would report all changes in resources (net assets) that result from or are
directed at carrying out an NFP’s purpose for existence (mission) and are available for current-period activities
(availability). Conversely, resources from activities that are unavailable for the current period, e.g., governing
board designations and appropriations, and investing and financing activities, do not meet the availability and/or
mission dimensions and would not be presented as operating activities without donor restrictions.
Acquired Collection Items Not Capitalized
If the NFP acquires an item for a permanent collection with resources without donor restrictions and elects not to
capitalize that item, the NFP would present the immediate write-off within the operating activity section in the
statement of activities. These items are typically relevant to zoos, botanical gardens and historical sites, among
others. Under the proposal, FASB considers these acquisitions current-period events undertaken to further the
NFP’s mission.
Operating Excess (Deficit) Before Transfers (Subtotal No. 1)
The operating excess (deficit) before transfers subtotal includes activities where the resource inflows and outflows
are from or directed at carrying out an NFP’s purpose for existence and available for current-period operating
activities, as defined above, and donor-restricted support that became available in the period for carrying out the
NFP’s purpose (releases of restrictions). It excludes the effects of internal actions of governing board designations,
appropriations and transfers that make the resources available or unavailable in the current period and donorrestricted contributions not available until a future period when the restriction is met.
FASB believes the proposed required intermediate measures of operations should be helpful in communicating
the NFP’s financial performance and resource management (the relationship between resources used in
operations of a period and resources made available from current-period activities to fund those operations).
The metrics also should help users compare financial statements among the NFP sector as a whole—and
especially within an industry, such as health care.
NFPs would report reclassifications of net assets caused by release of donor restrictions separately in this subtotal
within revenues, gains and other support.
Operating Excess (Deficit) After Transfers (Subtotal No. 2)
The second subtotal reflects the sum of the first subtotal, “Operating Excess (Deficit) Before Transfers,” and the
effects of internal transfers resulting from governing board designations, appropriations and similar actions that
place or remove self-imposed limits on the use of resources, effectively making them unavailable (or available) for
current-period operating activities.
At a minimum, an NFP would present the aggregate of transfers out of operating activities separate from the
aggregate of transfers into operating activities. If an NFP does not display all transfers as discrete line items on the
face of the statement of activities, it would provide a note disclosure that provides details on the amounts and
types of transfers.
Under the proposal, an NFP would describe, in a note, the purpose, amounts and types of transfers used by the
entity’s governing board or its designees to manage operations, e.g., whether transfers were performed because
of standing board policies, as one-time decisions or for other reasons. In addition, NFPs would be required to
disclose qualitative and quantitative information about the nature of period-end board designations of net assets
without donor restrictions.
6
FASB Proposes Significant Changes to NFP Financial Reporting
Enhanced disclosure requirements will help users—namely donors and creditors—assess how limits imposed by
laws, contracts, donor restrictions and governing boards affect an NFP’s ability to meet its obligations, its needs
for external financing and overall financial stewardship.
One-Statement or Two-Statement Approach
FASB proposes retaining flexibility by allowing a one-statement or two-statement approach to present changes in
net assets. If an NFP uses a two-statement approach, i.e., a statement of activities and a statement of changes in
net assets, the statement of operations must end with the newly proposed intermediate measure of operations,
the operating excess (deficit) after transfers. The second statement must provide the information necessary to
derive total change in net assets. The required operating measures could, but need not be, presented on the same
page as the change in net assets without donor restrictions. This differs from current requirements for NFPs that
elect to provide an intermediate measure of operations, e.g., excess or deficit of operating revenues over
expenses, which require the NFP to present the operating measure on the statement that also reported the
change in unrestricted net assets for the period.
NFP business-oriented health care entities no longer would be required to report a performance indicator but may
do so.
Gifts of Long-Lived Assets & Cash to Acquire Long-Lived Assets
Gifts of Long-Lived Assets Without Donor-Imposed Restrictions
An NFP would report gifts of long-lived assets without donor-imposed restrictions as operating revenue in the
statement of activities when the asset is received. The NFP also would record a transfer out of operating and into
nonoperating activities for the entire amount of the gift, if not sold. This presentation reflects that the NFP entity
is placing the gifted long-lived asset in service rather than selling it. FASB proposes moving gifts of long-lived
assets out of operating activities due to the inherent long-term nature of long-lived assets making them
unavailable for current operations.
Gifts of & Contributions to Purchase Long-Lived Assets with Donor-Imposed Restrictions
FASB proposes NFPs initially record restrictions on purpose-restricted contributions of property, plant or
equipment (long-lived assets) and contributions of cash restricted for the acquisition or construction of long-lived
assets in net assets with donor restrictions. The contribution would be reclassified as net assets without donor
restrictions when the asset(s) are placed in service (or acquired), except when the donor also places a time or
purpose restriction on the use of the long-lived asset. This eliminates the current option for NFPs to present a
release from restriction over the useful life of the acquired long-lived asset. It also aligns with existing guidance for
NFP business-oriented health care entities.
If the contributed long-term asset contains donor stipulations specifying a time or purpose restriction on the
asset’s use that extends beyond when the asset is placed in service, the NFP would record the release into
operations over the life of the time restriction or as the purpose restriction has been met.
In addition, in the year the long-lived asset is placed in service (acquired or ready for its intended use), the NFP
would record a transfer out of current operations into nonoperating activities for the entire amount of the longlived asset. This treatment corresponds to the treatment of gifts of long-lived assets without donor-imposed
restrictions: The long-lived asset is not fully available to be used in the current period, and future revenues and
expenses related to the long-lived assets will, in theory, be matched in future periods and reported as operating
activities.
7
FASB Proposes Significant Changes to NFP Financial Reporting
Illustrated Proposed NFP Statement of Activities
Following is an illustrated example of an NFP statement of activities duplicated from the proposed ASU:
Not-for-Profit Entity A
Statem ent of Activities
Year Ended June 30, 20XX
(in thousands)
Without
Donor
Restrictions
With Donor
Restrictions
Total
Revenues and gains:
Contributions
$
8,640
$
8,390
$
17,030
Fees
5,200
5,200
Other
150
150
Gains
200
200
14,190
22,580
Total revenues and gains w ithout donor restrictions
Net assets released from restrictions (Note D):
Satisfaction of program restrictions
Satisfaction of equipment acquisition restrictions
21,990
(21,990)
-
1,500
(1,500)
-
Expiration of time restrictions
1,250
(1,250)
-
Appropriation from donor endow ment
7,500
(7,500)
-
Total net assets released from restrictions
32,240
Total revenues, gains, and other support w ithout donor restrictions
46,430
Expenses and losses:
Program A
13,100
13,100
Program B
8,540
8,540
Program C
5,760
5,760
Management and general
2,038
2,038
Fundraising
2,150
2,150
Total expenses
31,588
31,588
80
80
Total expenses and losses
31,668
31,668
Fire loss
Operating excess, before transfers
14,762
Board designations, appropriations and similar transfers to/(from) operations:
Investment returns appropriated from quasi-endow ment
2,000
Transfer of gifted equipment
Transfer of equipment acquired w ith donor-restricted funds and placed in service
Operating excess, after transfers
2,000
(140)
(140)
(1,500)
(1,500)
15,122
Nonoperating changes:
Investment return, net (Note E)
4,678
Interest expense
20,272
(382)
24,950
(382)
Actuarial loss on annuity obligations
(30)
(30)
Board designations, appropriations, and similar transfers to/(from) nonoperations:
Investment returns appropriated for current operations from quasi-endow ment
(2,000)
Transfer of gifted equipment
Transfer of equipment acquired w ith donor-restricted funds and placed in service
Increase (decrease) in net assets
140
1,500
1,500
19,058
Net assets at beginning of year
Net assets at end of year
(2,000)
140
(3,608)
73,619
$
92,677
$
15,450
197,021
270,640
193,413
$ 286,090
8
FASB Proposes Significant Changes to NFP Financial Reporting
Illustrated Proposed NFP Statement of Activities for a Health Care Entity
Following is an illustrated example of a statement of activities for a health care entity, duplicated from the
proposed ASU:
Not-for-Profit Entity-Health Care Entity
Statem ent of Operations
Year Ended June 30, 20XX
(in thousands)
Without Donor
Restrictions
Operating revenues and support:
Patient revenue, net of contractual allow ances and discounts
$660,230
Premium revenue
33,342
Other operating revenue
21,780
Contributions
1,216
Donated property, plant, and equipment
1,940
Expiration of restrictions
Total operating revenue and support
6,145
724,653
Operating expenses:
Salaries and benefits
305,900
Purchased services
257,550
Supplies
84,820
Depreciation and amortization
32,040
Bad-debt expense
19,777
Other
2,500
Total operating expenses
Operating excess, before transfers
702,587
22,066
Transfers to/(from) operating activities:
Gifted property, plant, and equipment placed in service
Operating excess, after transfers
(3,290)
$18,776
9
FASB Proposes Significant Changes to NFP Financial Reporting
Not-for-Profit Entity-Health Care Entity
Statem ent of Operations
Year Ended June 30, 20XX
(in thousands)
Without Donor Restrictions:
Operating excess, after transfers
$18,776
Nonoperating activity:
Investment return, net
Interest expense
Pension-related changes other than net periodic pension costs
9,302
(7,350)
2,300
Transfers (to)/from operating activities:
Gifted property, plant, and equipment placed in service
Increase from nonoperating activities
Increase in net assets w ithout donor restrictions
3,290
7,542
26,318
With Donor Restrictions:
Contributions
Expiration of restrictions
Investment return, net
Increase in net assets w ith donor restrictions
Increase in net assets
Net assets at beginning of year
Net assets at end of year
2,390
(6,145)
5,152
1,397
27,715
270,250
$297,965
10
FASB Proposes Significant Changes to NFP Financial Reporting
Illustrated Proposed NFP Statement of Activities for a University
Following is an illustrated example of a statement of activities for a university, duplicated from the proposed ASU:
Not-for-Profit Entity--University
Statem ent of Activities
Year Ended June 30, 20XX
(in thousands)
Without Donor
Restrictions
Tuition and fees, net of tuition discount of $143,250
$
With Donor
Restrictions
370,215
Total
$ 370,215
Government grants
15,380
Contributions, grants, and bequests
28,860
Auxiliary services and sales
11,800
11,800
8,560
8,560
Interest on student and employee loans
15,380
$
19,400
48,260
434,815
Net assets released from restrictions:
Satisfaction of program restrictions
27,000
(27,000)
-
Satisfaction of equipment acquisition restrictions
12,100
(12,100)
-
Expiration of time restrictions
Appropriation of endow ment returns w ith purpose restrictions satisfied
Appropriation of endow ment returns w ithout purpose restrictions
9,200
(9,200)
-
10,000
(10,000)
-
8,000
(8,000)
-
66,300
Total revenue and support
501,115
Expenses:
Instruction and academic support
213,100
213,100
Student services
75,680
75,680
Research
70,940
70,940
Management and general
50,100
50,100
Fundraising
22,150
22,150
Total operating expenses
431,970
Excess operating revenues and support over expenses, before transfers
69,145
Transfers to/(from) operating activities:
Transfer to operating activities
Aggregate of transfers from operating activities
21,945
21,945
(27,850)
(27,850)
Excess operating revenues and support over expenses, after transfers
63,240
Investment return, net
39,050
Interest expense
(7,220)
(7,220)
(21,945)
(21,945)
27,850
27,850
50,270
89,320
Transfers (to)/from operating activities:
Transfer to operating activities
Aggregate of transfers from operating activities
Change in net assets
100,975
3,370
Net assets at beginning of year
468,400
260,500
728,900
263,870
$ 833,245
Net assets at end of year
$
569,375
$
104,345
11
FASB Proposes Significant Changes to NFP Financial Reporting
Functional & Natural Expense Classifications & Cost Allocation
To provide useful information for users to associate expenses with service efforts and accomplishments, FASB
proposes that all NFPs (not only health and welfare entities) report operating expenses by both their function and
nature in a single location. Entities would have a choice to present the expenses in the statement of activities, in a
separate financial statement, e.g., a statement of expenses, or as a schedule in the notes to the financial
statements.
The proposed ASU clarifies that all operating activities would require allocation in the functional expense analysis,
except external and direct internal investment expenses that the entity has netted against investment return.
Operating costs associated with more than one function (program service and/or supporting activity) would
require allocation by management. Supporting activities often include management and general fundraising and
membership development activities.
As part of the update, FASB proposes refining the definition of management and general activities and providing
guidance through examples to better illustrate which costs, if any, are due to direct conduct and direct supervision
of program and support functions and therefore should be allocated among program and/or support functions.
Typical expenses in the natural classification include salaries, rent, utilities, depreciation, awards and grants to
others and professional fees. Functional expense classification includes major classes of program services and
supporting activities. Nonoperating expenses, e.g., interest and other financing expenses, are neither required to
be nor precluded from being reported by function.
FASB proposes that NFPs disclose the methods used to allocate costs among functions to help users assess the
types of resources used and how they were allocated in carrying out an NFP’s operating activities.
Voluntary Health & Welfare Organizations
Under the proposed update, voluntary health and welfare organizations no longer would be required to provide a
statement of functional expenses; rather, like other NFPs, they would provide such information about expenses on
the face of the statement of activities, as a separate statement or in notes to financial statements. FASB concluded
the new requirements are adequate in associating expenses with service efforts and accomplishments for all
entities.
Net Investment Income
Existing accounting guidance for investment returns is unclear and the accounting is inconsistent—some NFPs net
investment expenses against investment income on the face of the statement of activities, while others do not.
FASB proposes clarifying the guidance, requiring NFPs to present, as a separate line item within nonoperating
activities on the face of the statement of activities, nonprogrammatic investment returns net of external and direct
internal investment expenses. The requirement would apply regardless of either of the following:

Activities are managed by internal staff, outside investment managers, volunteers or a combination

The NFP uses mutual funds, hedge funds or other vehicles for which management fees are embedded in
the investment return of the vehicle; direct internal investment expenses include direct internal
investment advisory costs such as salaries and benefits of a chief investment officer.
Providing relief, NFPs no longer would be required to disclose investment-related expenses, other than the
amount of internal salaries and benefits related to those investment activities, if any, that have been netted
against investment return. NFPs investing in mutual funds and hedge funds, for example, where managed fees are
embedded in the investment return should particularly benefit from the proposed updates.
FASB believes requiring an NFP to report investment income net of external and direct internal investment
expenses will provide a more comparable measure of investment returns across all NFPs.
12
FASB Proposes Significant Changes to NFP Financial Reporting
Statement of Cash Flows
Direct Method
In an effort to give users desired sustainability information and further insight into liquidity information, FASB
proposes requiring the direct method of presenting operating cash flows. An NFP would report major classes of
gross cash receipts and gross cash payments from operating activities, defined as “all transactions and other
events that are not defined as investing or financing activities,” as operating cash flows. Major categories of
operating activities include cash collected from customers, receipts of contributions for any purpose other than
those classified as financing, e.g., contributions for permanent endowments, receipts from sales of property, plant
or equipment, cash paid to employees and other suppliers of goods and services, income taxes paid and other
operating payments.
The requirement to reconcile the change in net assets to net cash flows from operating activities, often referred to
as the “indirect method,” would be removed. An NFP may choose to report net operating cash flows indirectly, in
addition to the direct method. If an NFP chooses to report the reconciliation of change in net assets to net
operating cash flow, it may report that information within the statement of cash flows, in a separate schedule or in
a note disclosure.
Classification Changes
To enhance the clarity and utility of the statement of cash flows, the proposal would realign certain operating
items to better correspond with the NFP’s activities statement, as follows:
Cash Flow Presentation Changes
From

Purchases of long-lived assets

Contributions restricted to acquire
long-lived assets

Sales of long-lived assets


To
Investing
Operating
Cash receipts of interest and dividends on
loans and investments other than those
made for programmatic loans
Operating
Investing
Cash payments to lenders and other
creditors for interest, including cash
management activities
Operating
Financing
The reclassifications better align operating items reported in the statement of activities, which is based on the
mission principle—whether “resource inflows and outflows are from or directed at carrying out an NFP’s purpose
for existence”—with the statement of cash flows. For example, cash receipts or payments associated with
programmatic investing are classified as operating cash flows, while general investing and financing activities are
nonprogrammatic cash flows, which would be classified as investing activities.
Business Combinations
The proposed guidance provides that NFPs report cash flows from an acquisition of an entity that primarily
furthers the mission of the not-for-profit entity as an operating cash flow. All other acquisitions would continue to
be classified in investing cash flows.
13
FASB Proposes Significant Changes to NFP Financial Reporting
Illustrated Proposed NFP Statement of Cash Flows
Following is an illustrated example of an NFP statement of cash flows using the direct method of reporting each
category of cash flows: operating, investing and financing. The example is duplicated from the proposed ASU:
Not-for-Profit Entity A
Statem ent of Cash Flow s
Year Ended June 30, 20XX
(in thousands)
Cash flow s from operating activities:
Cash received from service recipients
$
Cash received from contributors, restricted for investment in land, buildings, equipment
5,220
1,210
Cash received from contributors, other
10,645
Proceeds on sale of equipment
200
Insurance proceeds from fire loss on building
250
Miscellaneous receipts
150
Cash paid to employees and retirees
(13,400)
Cash paid to suppliers
(5,858)
Grants paid
(5,175)
Purchase of equipment
(1,500)
Net cash used by operating activities
(8,258)
Cash flow s from investing activities:
Interest and dividends received
8,870
Proceeds from sale of investments
76,100
Purchase of investments
(74,900)
Net cash provided by investing activities
10,070
Cash flow s from financing activities:
Proceeds from contributions restricted for:
Investment in endow ment
200
Investment in term endow ment
70
Investment subject to annuity agreements
200
Payments of annuity obligations
(145)
Payments of interest
(382)
Payments on note payable
(1,140)
Payments on long-term debt
(1,000)
Net cash used by financing activities
(2,197)
Net decrease in cash and cash equivalents
(385)
Cash and cash equivalents at beginning of year
4,960
Cash and cash equivalents at end of year
$
4,575
Supplemental data for noncash operating, investing, and financing activities:
Gifts of equipment
Gift of paid-up life insurance, cash surrender value
$
140
80
14
FASB Proposes Significant Changes to NFP Financial Reporting
Disclosures
FASB proposes enhanced disclosures to complement and supplement the proposed financial statements and
classes of net assets. FASB believes the disclosures will assist users in assessing management’s ability to manage
resources and maintain adequate liquidity. Disclosure requirements include the effects of internal designations,
appropriations and similar actions that limit the use of resources and make them unavailable (or available) for
current-period operating activities. Disclosures about self-imposed limits provide information regarding the NFP’s
ability to allocate resources toward needed services and meet near-term demands for cash. For example, the NFP
would provide a description of the purpose, amounts and types of limitations on assets limited as to use on the
statement of financial position, as well as the interrelationship to transfers on the statement of activities.
15
FASB Proposes Significant Changes to NFP Financial Reporting
Summary of New & Clarified Disclosures
Following is a summary of new disclosures proposed in the ASU:
Proposed Additional Disclosures
Liquidity,
Including
Information
About
Transfers

Quantitative & qualitative information useful in assessing the NFP’s liquidity position, as
well as how the entity manages its liquidity, including:
•

A description of the methods the governing board and its designees use to
manage the NFP’s liquidity needs, including a definition of the time horizon
used, e.g., 30, 60 or 90 days, and basis for determining that time horizon
• Qualitative information about how the entity manages its liquidity position,
including:
 The NFP’s strategy for addressing entitywide risks that may affect liquidity,
including its use of lines of credit
 Policy for establishing liquidity reserves
• The total amount of financial assets as of the reporting date
• Relevant information about the nature and amount of financial assets not
available to meet near-term demands for cash that corresponds with the time
horizon used by the NFP for managing its liquidity because of either external
limits, or internal designations, appropriations and transfers made by the NFP
governing board
• The total financial liabilities due that correspond with the time horizon used by
the NFP for managing its liquidity
• The nature and composition of net assets with donor restrictions at the end of
the period, as well as how the restrictions affect the amount of net assets not
available to meet cash needs within the time horizon
For all transfers (governing board designations, appropriations and similar transfers that
result in the addition or removal of self-imposed limits on the use of resources without
donor-imposed restrictions) reported after the “operating excess (deficit) before
transfers” subtotal and before the “operating excess (deficit) after transfers” subtotal:
•
•
•
Underwater
Endowment
Funds
A description of the purpose, amounts and types of transfers used by the
entity’s governing board or its designees to manage operations, e.g., whether
transfers are due to standing board policies, one-time decisions or for other
reasons
Qualitative and quantitative information about the nature of period-end board
designations of net assets without donor restrictions, e.g., the interrelation of
transfers to net asset designations, including the types of limitations on assets,
including cash and cash equivalents, limited as to use on the statement of
financial position
Details on amounts and types of transfers presented on an aggregated basis on
the face of the statement of activities (if all transfers are not displayed as
discrete line items on the face of the statement of activities)
The aggregated original gift amount or amount required to be maintained by the donor or by
law, the aggregate fair value of the underwater endowment funds and the aggregate amount of
the deficiencies of the underwater endowment funds
The governing board policies or decisions to spend or not spend from underwater endowment
funds
16
FASB Proposes Significant Changes to NFP Financial Reporting
Operating
Expenses
If not reported in the statement of activities or a separate statement of expenses, the types of
resources used in carrying out operating activities (expenses by nature) and how they are
allocated (expenses by function)
Cost Allocation
A qualitative description of the method used to allocate costs among program and support
functions
Net
Investment
Returns
The amount of internal salaries and benefits, if any, netted against investment return (NFPs no
longer would be required to separately disclose the amount of investment expenses netted
against investment returns, other than internal direct costs of salaries and benefits)
Fair Value
Disclosures
Clarifies that an NFP should disclose the aggregate carrying amount of investments by major
type and may choose to combine these disclosure requirements with fair-value-level hierarchy
disclosures, as required in Topic 820 on fair value measurement
Statement of
Cash Flows
When an NFP chooses to additionally report net operating cash flows indirectly (if not reported
within the statement of cash flows or in a separate schedule), the reconciliation of change in net
assets to net operating cash flow
Information about certain significant noncash operating activities and all noncash investing and
financing activities during a period that affect recognized assets or liabilities—this should be in a
narrative or summarized in a schedule, clearly referenced to the statement of cash flows and
clearly relating the cash and noncash aspects of transactions involving similar items
Tax-Exempt
Status
Requirement for business-oriented health care entities to disclose their tax-exempt status is
removed
Consolidation
Amended guidance related to noncontrolling interests to incorporate the operating excess
before transfers and after transfers
Accounting
Change
Clarifies to require disclosure of the effect of an accounting change for both the operating excess
before transfers and after transfers
Transition Guidance
FASB proposes NFPs implement the new standards on a retrospective basis. NFPs would not be required to apply
the amendments to interim financial statements in the initial year of application, but information for those interim
periods would be restated only if reported with annual financial statements for that year. The year the final ASU is
first applied, an NFP would disclose the nature of any reclassifications or restatements and any effects on changes
in the net asset classes for each year presented.
FASB is waiting to hear constituent feedback before deciding on an effective date, including whether that date
would be the same for all NFPs and whether early adoption would be permitted. For more information on how
these proposed changes could affect your organization, contact your BKD advisor.
Contributor
Connie Spinelli
Director
303.861.4545
cspinelli@bkd.com
17