As noted in the Winter 2011 issue of the Nonprofit Standard, the Financial Accounting Standards Board (FASB or the Board) added a standard-setting project to its agenda entitled “Not-for-Profit Financial Reporting: Financial Statements.” This project is focused on examining the financial statements and related disclosures that are unique to nonprofit organizations. The main focus points of the project include the reexamination of the existing standards related to net asset classification and other topics such as how nonprofit organizations show their liquidity, financial performance and cash flows.
To date, the Board has deliberated on the net asset and intermediate operating measure project components and has made certain tentative decisions that are discussed below.
Currently, the Board has made the tentative decision to replace the current requirement to show three classes of net assets: unrestricted, temporarily restricted and permanently restricted and to replace this with two classes of net assets. The net asset classes would be presented as net assets with donor-imposed restrictions and without donor-imposed restrictions. The two classes of net assets would still be presented on the face of the statement of financial position in total and for changes in each of those classes on the face of a statement of activities and would be subject to similar requirements.
The current requirement to provide information about the nature and amounts of different types of donor-imposed restrictions would be maintained. However, the current distinction between temporarily and permanently restricted would be removed and the current focus would be on providing information regarding how and when net assets could be used. So, for example, in the footnote detailing the net assets, the components would potentially be described as (a) endowments, (b) purpose restricted and (c) time restricted.
The footnote disclosures would still need to provide information about the nature and amounts of net assets designated by the governing board.
The Board tentatively decided to define an intermediate operating measure that is based on two dimensions. The first is a mission dimension and would be based on whether resources are from or directed at conducting the nonprofit’s purpose for existence. The second is an availability dimension and would be based on whether resources are available for current period activities, and would reflect both external limitations and internal limitations set by the nonprofit’s governing board.
The Board has directed staff to discuss whether the availability dimension should be limited to resources that are liquid .The Board considered three options for the presentation of the intermediate measure in the statement of activities and tentatively decided to adopt the following option. All legally available mission-related revenues would be presented and, then, any reductions for amounts designated by the governing board for use in future periods would be shown as a transfer out of the intermediate operating measure. In this presentation, amounts that were previously designated by the governing board that became available in the current period would be shown as transfers into the intermediate operating measure.
The Board will address whether the intermediate operating measure will be required, permitted or encouraged at a future meeting.
On Sept. 9, 2013, the Board and FASB staff met with the FASB’s Not-for-Profit Advisory Committee (NAC) to discuss the tentative decisions outlined above. The NAC was established in 2009 to serve as a standing resource for the Board in obtaining input from the nonprofit sector on existing guidance, current and proposed technical agenda projects and longer-term issues affecting nonprofits.
NAC members generally agreed with the Board’s tentative decision to show two classes of net assets; however, some members raised questions about whether this would preclude entities from presenting additional information. The FASB staff clarified that the Board has not finalized the required disclosure related to this issue at this point but noted there is no intent to preclude organizations from disclosing more than the minimum information.
NAC members had mixed views on the tentative decision regarding the presentation of the operating measures specifically with regard to the analysis of liquidity versus availability included therein. NAC members felt there was confusion in the industry regarding these terms and that it would add additional difficulties and cost to the financial statement presentation process .The feedback received from the NAC will be considered by the FASB as it continues to work through this project.
The staff expects to discuss the liquidity and statement of cash flows presentation aspects of this project with the Board in October .These tentative decisions allow the project to continue to move forward. The Board projects that an exposure draft related to this project will be issued in the first quarter of 2014. We will continue to keep you apprised of the Board’s tentative decisions and the overall project status.
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*This article originally appeared in BDO USA, LLP’s “Nonprofit Standard Newsletter – Fall 2013“. Written by Laurie Arena De Armond, BDO CPA. Copyright © 2013 BDO USA, LLP. All rights reserved. http://www.bdo.com