FASB ISSUE A NEW STANDARD ON NOT-FOR-PROFIT FINANCIAL REPORTING

On August 18, 2016, the FASB issued a standard intended to simplify and improve how a not-for-profit organization classifies its net assets, as well as the information it presents in financial statements and notes about its liquidity, financial performance, and cash flows.

On August 18, 2016, the FASB completed Phase I of its Presentation of Financial Statements of Not-for-Profit Entities project by issuing ASU No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities. The new guidance simplifies and improves how not-for-profit entities classify net assets as well as the information presented in financial statements and notes about liquidity, financial performance, and cash flows. 

A future Phase 2 of FASB's project is slated to address additional issues, including:

• Operating measure: All other elements of the proposal not addressed in Phase 1, including: 
• Whether to require intermediate measure(s)
• Whether and how to define such measure(s) and what items should be included
• Alignment of measures of operations in the statement of activities with measures of operations in the statement of cash flows.

FASB has not indicated a time frame from the completion of phase II. We will post more information about phase II as it happens.

Nonprofit Accounting Info: Special Issues Relating to Implementation of FASB Statements 116, 117, and 124

For an excellent summary of the special accounting rules affecting Nonprofit organizations Look at these guide lines published by  Beta Alpha Psi (the honor organization for financial information students and professionals)

Go to this link to see the full guide: Special Issues Relating to Implementation of FASB Statements 116, 117, and 124

Here is what they say about Restricted Funding:

Frequently, donors stipulate how their gifts are to be used by placing restrictions on them. SFAS No. 116 requires recognition of contribution revenue upon the transfer of an economic benefit, usually the receipt of either the contribution (cash or other economic benefit) or a pledge (a promise to make a contribution in the future). Restrictions may be permanent, such as the establishment of an endowment in perpetuity, or they may be temporary, such as for next year's operations or a specific project.

The underlying concept of SFAS No. 116 is that receipt of restricted contributions does not amount to incurring a liability, but merely accepting limits on the future use of the contributions. The concept is based on the belief that adequate disclosure of donor-imposed restrictions and properly stated liabilities is more important than matching revenue and expenses.

Here is what they say about the classifying certain grant income as "contribtions" or "earned income"

.... However, many not-for-profit organizations receive "grants," "awards," or "sponsorships" that on the surface appear to be restricted contributions, but are in substance reciprocal or earned revenue transactions, because they amount to a contract for the purpose of services by the grantor or sponsor. This type of earned revenue can usually be identified by provisions that stipulate that the organization will receive a fixed amount per unit of service (such as per meal, per bed-day, etc.). Frequently, under such a contract, the organization must send the grantor a "voucher", which amounts to a statement of services provided and an invoice for the amount of the grant that was earned that month. The vouchers should be recorded as receivables. Sometimes, a grantor gives an organization an "advance" under the contract, knowing that payment for each month's voucher will not be paid for weeks or months; since the transaction is reciprocal, these advances should be recorded as deferred revenues (liabilities).

Go to this link to see the full guide: Special Issues Relating to Implementation of FASB Statements 116, 117, and 124

FASB: Tentative Board Decision Made: Financial statements of not-for-profit entities (phase 1).

See below for the FASB communication summarizing the tentative decision made at the 02/03/16 board meeting.  

Quick summary: 

1. Decision passed to require netting of external and direct internal investment expenses against investment return. 

2.    Decision passed not to require that not-for-profit entities (NFPs) disclose internal salaries and benefits that are netted against investment return. 

3.  Decision passed require all NFPs to disclose expenses by natural classification..

4. The board did not decide on the requirement for all not-for-profit entities to report on function and nature in a matrix or other format.  The board is looking into whether certain "business-like" NFPs should be excluded from this requirement.  It seems the board will then  require the function and nature reporting in all NFPs and possibly carve out an exception for "business-like" entities. "Business-like" entities to be defined later if necessary. 

You can access meeting agenda here.

You can view the webcast below;

February 3, 2016 FASB Board Meeting

TENTATIVE BOARD DECISIONS

Tentative Board decisions are provided for those interested in following the Board’s deliberations. All of the reported decisions are tentative and may be changed at future Board meetings.


 
Financial statements of not-for-profit entities (phase 1). 

The Board continued its Phase 1 redeliberations on the 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, focusing on the following topics:

1. Netting of external and direct internal investment expenses against investment return
2. Disclosure of netted investment expenses
3. Expenses by nature and analysis of expenses by function and nature
4. Enhanced disclosures about cost allocations and improved guidance on management and general activities.

Netting of External and Direct Internal Investment Expenses against Investment Return

The Board affirmed the proposal to require the netting of external and direct internal investment expenses against investment return. The Board also directed the staff to provide implementation guidance to illustrate what activities constitute direct internal investing activities.

Disclosure of Netted Investment Expenses

The Board decided not to require that not-for-profit entities (NFPs) disclose internal salaries and benefits that are netted against investment return. The Board affirmed its decision that NFPs are no longer required to disclose any other investment expenses that are netted against investment return.

Expenses by Nature and Analysis of Expenses by Function and Nature

The Board affirmed the proposal to require all NFPs to disclose expenses by natural classification. The Board also directed the staff to explore whether to exclude certain business-like NFPs from the current requirement to report expenses by function before considering whether to require an analysis of expenses by function and nature.

Enhanced Disclosures about Cost Allocations and Improved Guidance on Management and General Activities

The Board affirmed the proposal to require NFPs to provide enhanced disclosures about the method(s) used to allocate costs among program and support functions. The Board also affirmed the proposal to refine the FASB Accounting Standards Codification® 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.

FASB Not-for-Profit Project - Latest Decisions

TENTATIVE DECISIONS REACHED AT LAST MEETING DECEMBER 11, 2015

Tentative Board decisions are provided for those interested in following the Board’s deliberations. All of the reported decisions are tentative and may be changed at future Board meetings.

Financial statements of not-for-profit entities (phase 1). The Board discussed the following issues in Phase 1 of redeliberations for the 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):

1.             Methods of presenting operating cash flows

2.             The net asset classification scheme and related issues

3.             Information useful in assessing liquidity.

Methods of Presenting Operating Cash Flows

The Board decided not to require not-for-profit entities (NFPs) to use the direct method of presenting operating cash flows, but instead to continue to allow them to use either the direct method or indirect method. Further, the Board decided to no longer require the indirect reconciliation if an NFP chooses to use the direct method.

Net Asset Classification Scheme and Related Issues

The Board made decisions on the following issues:

1.             Requirement of two classes of net assets

a.             The Board affirmed its proposal to combine temporarily and permanently restricted net assets into net assets with donor restrictions and to rename unrestricted net assets net assets without donor restrictions. Consistent with the proposed Update, this alternative would retain the current generally accepted accounting principles (GAAP) requirement to provide relevant information about the nature and amounts of donor restrictions on net assets (either on the face of the statement of financial position or in notes).

2.             Disclosure of amounts and purposes of board-designated net assets

a.             The Board affirmed its proposal to require the disclosure of the amounts and purposes of board-designated net assets either on the face of the financial statement or in the notes.

3.             Classification and disclosure of underwater endowments

a.             The Board affirmed its proposal to require that the aggregate amount by which endowment funds are underwater be classified within net assets with donor restrictions rather than the current unrestricted category.

b.             The Board decided to affirm its proposal for endowment funds that are underwater, if any, to require the disclosure of:

i.              The NFP’s policy to either reduce expenditure or not spend from underwater endowment funds

ii.             The aggregate fair value

iii.            The aggregate original endowment gift amount or level required by donor stipulations or by law to be maintained

iv.            The aggregate of the amount of the deficiencies.

4.             Requirement of placed-in-service approach and elimination of over-time approach for expirations of restrictions to acquire or construct long-lived assets

a.             The Board affirmed its proposal to require, in the absence of explicit donor instructions, the placed-in-service approach for expirations of restrictions to acquire or construct long-lived assets, thus eliminating the over-time approach.

Information Useful in Assessing Liquidity

The Board discussed the proposal for providing qualitative and quantitative information useful for assessing liquidity and potential alternatives. The Board directed the staff to explore an approach that would require, like the proposal, qualitative information about how the NFP manages its liquidity and liquidity risks, but provide alternative ways of presenting quantitative information. This approach would emphasize information about assets that are liquid and available at the balance sheet date.