
INSIGHTS FOR NONPROFITS	FEBRUARY 16, 2016

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FASB Continues Redeliberation of Proposed Changes to Not-for-Profit Financial Reporting

On February 3, 2016, the Financial Accounting Standards Board, (FASB, Board) continued its consideration of feedback received from stakeholders on the April 2015 proposed FASB Accounting Standards Update, Not-for-Profit Entities (Topic 958) and Health Care Entities (Topic 954): Presentation of Financial Statements of Not-for-Profit Entities (the proposed Update). FASB redeliberations focused on three specific issues:

Reporting of investment return and disclosure of investment expenses
Reporting of expenses by nature and an analysis of expenses by function and nature
Providing enhanced disclosure about cost allocations and improved guidance on management and general activities

Reporting of investment return and disclosure of investment expenses

The proposed Update requires not-for-profit entities to report investment return net of external and direct internal investment expenses, with disclosure of internal salaries and benefits included in those internal investment expenses. By a narrow margin of 4-3, the Board voted to remove the requirement to disclose the internal salaries and benefits. Therefore, investment expenses will no longer be required to be disclosed; neither will they be included in functional expenses. The presentation of a single total for net investment return also applies to the rollforward information contained in an endowment rollforward disclosure.

While some members of the Board thought that internal salaries and benefits information was useful to disclose because NFPs have direct control over those salaries and benefits, others thought that the distinction between internal and external investment management expenses was not particularly helpful. Instead, they thought that net investment return was the most important element in evaluating an organization's performance in regard to its investment management activities.

Reporting of expenses by nature and an analysis of expenses by function and nature

While the Board was unanimous in its support of requiring NFPs to report expenses by nature (other than netted investment expenses), it was unable to achieve clarity regarding which entities also should be required to present information by function, and which entities should be required to present information by-nature-by-function in a matrix format.

In a wide-ranging discussion, the Board considered whether there were some organizations for which it might make sense to report only expenses by function (e.g., a private foundation with only grant-making and administrative expenses), and whether certain business-like NFPs (e.g., certain health care organizations, certain member organizations and perhaps others) should be exempted from functional expense reporting, and instead be subjected to business segment reporting requirements, regardless of whether they were a public or private entity (at present, segment reporting is required only of public entities). At one point during the discussion, one Board member seemed to sum up the complexity of the issue by saying, "We're not sure we know what function and nature are."

The Board instructed staff to research the implications of having businesslike entities scoped out of functional reporting, or replacing functional expense reporting with segment reporting for those entities and whether or not re-exposure of this issue is advisable.

Providing enhanced disclosure about cost allocations and improved guidance on management and general activities

The Board unanimously affirmed its decision to require NFPs to provide enhanced disclosures about the method(s) used to allocate costs among program and support functions, to refine the Accounting Standards Codification's definition of management and general activities, and to provide additional implementation guidance to better depict the types of costs that can be allocated among program and/or support functions and those that should not be allocated.

Tim McCutcheon

Partner

303.459.6760

tmccutcheon@eidebailly.com

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