FASB updates not-for-profit reporting rules

Non-profit organizations: your accounting rules have changed. In an announcement, the Financial Accounting Standards Board (FASB) said the rules cover a great deal of not-for-profit territory:

“Not-for-profit organizations that will be affected include charities, foundations, colleges and universities, health care providers, religious organizations, trade associations, and cultural institutions, among others.”

The FASB-issued Accounting Standards Update says the updated rules

“simplifies and improves how a not-for-profit organization classifies its assets.” Information regarding not-for-profits financial performance, liquidity, and cash flows are also included in the update.

The FASB could be expected to say that the new rules improve the non-profit landscape. But do they? If you’re a non-profit, you can be the judge. But whether you think so or not, you have to follow them. This is the first major update since 1993.

Four main problems in not-for-profit reporting were identified as reasons for the update:

1. “Complexities about the use of the currently required three classes of net assets that focus on the absence or presence of donor-imposed restrictions and whether those restrictions are temporary or permanent.
2. Deficiencies in the transparency and utility of information useful in assessing an entity’s liquidity caused by potential misunderstandings and confusion about the term unrestricted net assets and how restrictions or limits imposed by donors, grantors, laws, contracts, and governing boards affect an entity’s liquidity, classes of net assets, and financial performance.
3. Inconsistencies in the type of information provided about expenses of the period—for example, some, but not all, NFPs provide information about expenses by both nature and function.
4. Impediment of preparing the indirect method reconciliation if an NFP chooses to use the direct method of presenting operating cash flows.”

Having identified what it saw as the problems, the FASB set out to present what it sees as solutions. The outcome of public comments, meetings, roundtable discussions, and staff deliberations encompassed “qualitative and quantitative requirements” for:

• Net Asset Classes
• Investment Return
• Expenses
• Liquidity and Availability of Resources
• Presentation of Operating Cash Flows.

For example, there are now two asset classes to report rather than the previous three, presumably simplifying reporting of charitable assets in financial statements for post-Dec. 15, 2017 fiscal years. Immediately available cash will be differentiated from cash set aside for future purposes: this reduces cash classifications from three to two.

The FASB also says,

“The ASU requires improved presentation and disclosures to help not-for-profits provide more relevant information about their resources (and the changes in those resources) to donors, grantors, creditors, and other users.”

Thus, this can be considered from two angles: FASB’s stated objectives to simplify financial statement reporting and provide more information while at the same time requiring more rigorous standards with respect to the information in the reporting. The FASB taketh away, and the FASB loadeth up. It’s the way of the regulatory world.

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