This past spring, the Financial Accounting Standards Board (FASB) issued a proposal that would include changes to the net asset classification requirements for Not-For-Profits as well as how they disclose financial information. The FASB voted 5-2 although, some board members are concerned the new changes may ultimately make reporting more complex. The 5 yes-voting board members hope that these new changes will help aid potential donors and lenders, by making NFPs more financially informative. The changes also aim to make NFPs more financially comparable.
It is of utmost importance that all NFPs understand the significance of the new proposed changes. So how does this proposal potentially affect your Not-For-Profit organization? Well first, NFPs would be required to detail expenses in either the face of the statement of activities, within the notes or in a separate statement by both nature and function. This statement of functional expenses was previously only required for voluntary health and welfare organizations. On the face of the statement of activities, all NFPs would be required to show a net presentation of investment expenses against investment return. However, a disclosure of external investment expenses netted against investment returns would no longer be required.
In an effort to make statements easier to understand, NFPs would be required to report cash flows using the direct method rather an indirect method, often preferred and used in the past. For many nonprofits, Tammy Whitehouse of Compliance Week believes the change may make compliance more costly and difficult. Further, a number of cash flow activities would now be reclassified into different categories.
There are many other changes that affect entities of all sizes. We recommend everyone with an interest in financial reporting for nonprofit organizations read the proposal and comment to the FASB with any suggestions. If your company has concerns or questions about FASB’s new proposal, it is wise to consult with professionals, as these changes can have a significant impact on future reporting. The proposal will be open to comments on FASB’s website through August 20th.
No information contained in this communication can be relied upon as legal or tax advice. It is not intended and cannot be used, relied or acted upon without professional guidance and advice.