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July 13, 2015 Experts Corner

FASB proposes major accounting changes for nonprofits

Katrina Olson
By Katrina Olson

The Financial Accounting Standards Board (FASB) announced in April proposed changes to reporting for nonprofit organizations that will impact the approximately 13,340 nonprofits currently registered with the state Department of Consumer Protection.

The proposal represents the first major overhaul of nonprofit reporting requirements in more than two decades.

Changes are expected to be widespread, affecting all areas of the financial statements. Here are a few of the significant changes:

Net assets

With multiple proposed changes on the table, the greatest impact calls for elimination of the three classes of net assets: unrestricted, temporarily restricted, and permanently restricted. If passed, nonprofits would have to report two classes of net assets: net assets with donor restrictions and net assets without donor restrictions.

The current distinction between permanent restrictions and temporary restrictions has become blurred in recent years due to changes in state laws. Many states allow nonprofits to spend from permanently restricted endowment funds under certain circumstances.

FASB hopes simplifying the number of classes of net assets will improve understandability and reduce complexity.

Income statement

Another significant change would impact the statement of activities, which presents a nonprofit's income and expenses. The proposed rule would require all nonprofits to report net income or loss from operating activities separate from non-operating activities. This would more clearly show the income and costs directly related to accomplishing the mission of the organization.

Non-operating activities, such as investment earnings or losses, can distort the operating bottom line. This makes it difficult for an interested party to distinguish the financial performance directly related to the nonprofit's mission.

Cash flows

A change likely to stir the most controversy is the proposed overhaul of the statement of cash flows, which identifies the organization's sources and uses of cash.

Key stakeholders frequently gloss over the statement of cash flows, considering it unreadable. FASB's proposed change would present the statement using the direct method, requiring the reporting of cash receipts from key revenue sources as well as disbursements to suppliers versus to employees for wages. It's anticipated that this change would provide a clearer presentation of cash in and out related to operations.

Proponents argue the change will provide more useful information to key stakeholders, although some nonprofit advocates take issue with any change that would cause greater disparity between reporting requirements of nonprofits versus for-profit businesses.

FASB's proposal comes at a time when stakeholders have increasingly complained that improvements are needed to the financial statement presentation for nonprofits to provide better information for decision-makers regarding a nonprofit's financial performance, service efforts, need for external financing, and stewardship of donor funds.

The proposal has been years in the making, dating back to late 2009 with the formation of the Not-for-Profit Advisory Committee (NAC) — a group formed to work with FASB to focus on financial reporting issues affecting the nonprofit sector.

A handful of nonprofit accounting rule changes have passed in the years since the formation of the NAC — the current proposal represents the most sweeping modification to nonprofit reporting requirements, thus far.

Nonprofits and accountants may view these changes as extra work in the short-term, however we can only hope nonprofits will reap the anticipated benefits of providing better information to decision-makers.

FASB's proposed changes are expected to be effective for 2017. In the meantime, FASB invites individuals and organizations to weigh in on the proposed changes before Aug. 20, 2015. To comment, visit the FASB website at www.fasb.org and click on Exposure Documents Open for Comment, or email director@fasb.org. 

Katrina Olson is an audit manager with Whittlesey & Hadley P.C. in downtown Hartford.

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