Proposed Accounting Changes for Not-for-Profits

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The Financial Accounting Standards Board (FASB) recently released an exposure draft of a Proposed Accounting Standard Update which will impact Not-for-Profit Entities (Topic 958) and Health Care Entities (Topic 954). The objective of the update is to improve the requirements for net asset presentation and improve the information in the financial statements and notes relating to a not-for-profit (NFP) entity’s liquidity, financial performance and cash flows. The update represents the first major changes to authoritative guidance for NFPs since Financial Accounting Standard 117 Financial Statement Presentation for Not-for-Profit Organizations was issued in 1993.

The major changes are summarized below. The comment period for the exposure draft ends on August 22, 2015.

Statement of Financial Position

Currently, net assets of an organization are presented in three classes: unrestricted, temporarily restricted and permanently restricted. However, the exposure draft proposes that net assets will be reported in two classification: net assets without donor restrictions and net assets with donor restrictions, essentially combining the temporarily restricted and permanently restricted net asset classifications. Net assets with donor-imposed restrictions include funding that is restricted for use at a specified time, purpose or in perpetuity. The proposed update indicates that the nature of donor restrictions can be shown on the face of the statement of activities or in a separate footnote within the disclosures.

Current disclosures require that the liquidity of an NFP’s assets and liabilities be disclosed in the notes to the financial statements unless the information is already presented on the face of the statement of financial position. The proposed update will also require an NFP’s notes to the financial statements to include additional information regarding liquidity in addition to presenting the information on the face of the statement of financial position. Relevant information to be disclosed in the notes to the financial statements will include amounts that are not available to meet cash needs within a specified time whether due to external limits or internal designations, appropriations, or transfers and the total amount of financial liabilities that are due within that same time period. Additionally, the NFP will be required to disclose the total amount of financial assets and to provide qualitative information regarding how the entity manages its liquidity position. Relevant information about liquidity management may include strategies for addressing entity-wide risks affecting liquidity, policy for establishing liquidity reserves, and the basis for determining the time horizon used for managing liquidity.

Statement of Activities

One of the most significant proposed changes to the statement of activities would require that operating and non-operating activities be presented separately prior to any reclassifications of net assets. Activities would be defined as operating if they meet a mission dimension and availability dimension, which is defined as funds that are available for current activities and are not limited by internal or external factors. Non-operating activities would include any non-programmatic investing and financing activities.

Statement of Functional Expenses

Currently, only voluntary health and welfare organizations are required to include a statement of functional expenses in their external financial statements, although many NFPs elect to present this information. Under the proposed update, all organizations would be required to report expenses by nature and by function either on the face of the statement of activities, in a separate financial statement or as a schedule in the footnotes.

Statement of Cash Flows

Current standards allow the option to present operating cash flows by either using the direct or indirect method. Under the direct method, an organization would present operating cash flow by totaling cash receipts and payments made during the accounting period, while the indirect method provides a reconciliation between net income and operating cash flows. Most organizations elect to use the indirect method to present operating cash flows. The proposed accounting standard update would require that all organizations present the statement of cash flows using the direct method; an organization may elect to also present the indirect method of operating cash flows.

The proposed update also suggests several changes to the classification of certain transactions in the statement of cash flows. The purchase and sale of any property, plant or equipment, which is currently presented as an investing activity, would be moved to the operating activity section of the statement of cash flows. Cash paid for interest would be classified as a financing activity as opposed to an operating activity. Finally, organizations with investments will need to make a distinction between programmatic and non-programmatic investing, meaning whether investments are specifically directed for the NFP’s purpose for existence or for the general production of income or appreciation of investments. Any activities related programmatic investments would be classified as an operating activity, while non-programmatic investments would be classified as an investing activity.


The FASB has issued FAQs regarding the proposed update. Further developments will be posted at If there are any questions or concerns of how the proposed update may impact your organization, please contact Jeff Ford or Steve Heere at 412-338-9300.

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