The New Financial Statements of Not-for-Profit Entities:

How Future Changes Could Affect Your Financial Reporting Requirements

By: Joe Splinter

The FASB has decided to move ahead with issuance of an exposure draft on its longstanding Financial Statements of Not-for-Profit Entities project. The exposure draft is expected to be released in April, with a public comment period lasting through July 31, 2015. 

FASB did not propose either an effective date or an implementation schedule for the new standard-instead, it will evaluate respondents' comments to help determine an appropriate date (or dates) during its re-deliberation following the comment period. 

The intent of the exposure draft is to improve net asset classification requirements and information provided in financial statements and disclosures about liquidity, financial performance, and cash flows.

Some of the tentative decisions that may impact not-for-profit health care organizations are: 

Net Asset Classifications Changes

• The number of net asset classes will be reduced from the current three (Unrestricted, Temporarily Restricted and Permanently Restricted) to two (Without Donor Restrictions and With Donor Restrictions)
• New disclosure requirements related to the amount, purpose, and type of board-designated net assets without donor restrictions

Balance Sheet/Statement of Financial Position

• New disclosure requirements regarding liquidity:

1. Timeframes used to manage liquidity

2. How the not-for profit entity manages its short-term liquidity

3. Quantitative measures of assets available or not available and related current obligations due within the liquidity timeframe

 Statement of Operations/Activities

• All entities will be required to provide an overall operating measure based on two dimensions - Mission and Availability of Resources. This measure will likely replace the performance indicator in health care entities.

  1. Mission - Resources received from, or directed at, carrying out a not-for-profit's purpose for existence (investing and financing activities generally would be excluded, as would all equity transactions)

  2. Availability of Resources - Resources available for current period activities, excluding those that have limits imposed by external donors or board action

• Items excluded from the operating measure include investment return, pension activity, equity transactions with affiliates, designations made/removed by the board, and any income or expense that is not mission-related
• The operating measure will include a reconciliation with transfers to and from operating activities, including a subtotal before and after these transfers

Statement of Cash Flows

• Must be presented using the direct method
• Certain items will be re-categorized

1. Interest and dividends will be reported as an "investing activity"

2. Interest on long-term debt will be reported as a "financing activity"

3. Purchase of property, plant, and equipment and proceeds from sales will be presented as "operating activities"

4.  Contributions restricted for property, plant, and equipment will be reported as an "operating activity"

Click here to read additional details of the tentative decisions made by FASB that are to be incorporated into the upcoming exposure draft, including illustrative statements.

The exposure draft will require retroactive application of the proposed changes. While it is still uncertain if there will be any specific separate authoritative guidance for health care entities, it appears significant changes will be necessary to the financial statements for all not-for-profit entities.

If you have any questions regarding this topic, please contact your Eide Bailly representative. In addition, as more information becomes available, look for more comprehensive information on these proposed changes to be released at a later time.