Question

In April of 2015, the FASB issued an Exposure Draft related to financial reporting of not-for-profit organizations. As a result of feedback received from constituents, the FASB decided to divide the proposed update to not-for-profit financial reporting into two phases. Phase one was completed and resulted in Accounting Standard Update (ASU) 2016-14, Presentation of Financial Statements of Not-For-Profit Entities. Phase two considers whether a measure of operations should be required, and, if so, how it should be measured. At the FASB board meeting on May 29, 2013, the FASB tentatively decided to define an operating measure on the basis of two key dimensions: (1) whether resources are from or used to carry out the mission of the organization and (2) whether resources are available for use in the current period. As this textbook goes to press, the FASB has not yet begun to redeliberate phase two.

Required:

a. Research the current status of phase two of the FASB project. (Hint: The FASB website is www.fasb.org. However, you may wish to also search for other current articles about the project.) Write a summary of the project status to date. Has the FASB deliberated on phase two? If so, what is the status of those deliberations?

b. In addition to the operating measure component of phase two of the project, there were two other project objectives. Identify the objectives and discuss what, if any, proposals are being considered as part of these objectives.

c. After having performed this research, what is your opinion? Do you believe the proposed changes will, in fact, improve financial reporting? Explain the rationale for the position you take.

Answer 1

a. Summary of the Project

The current not-for-profit financial reporting model has held up well for over 20 years since the issuance of Statement of Financial Accounting Standards No. 117, Financial Statements of Not-for-Profit Organizations, in 1993. However, stakeholders voiced concerns about:

• Complexities in the use of the required three classes of net assets.
• Deficiencies in the transparency and utility of information in assessing an organization’s liquidity
• Inconsistencies in the type of information provided about expenses, and
• Misunderstandings about and the limited usefulness of the statement of cash flows, particularly with regards to the reporting of operating cash flows.

Based on these concerns, the FASB’s Not-for-Profit Advisory Committee and other stakeholders suggested that an update would be beneficial.

In April 2015, the FASB issued an exposure draft with proposed improvements to the financial reporting model of not-for-profits. The exposure draft received extensive feedback, resulting in re-deliberations of the project.

Eventually, the FASB split the proposed changes into two phases.

Phase one, which resulted in ASU 2016-14, comprised the proposed improvements that received a higher amount of positive responses.

Phase two, which addresses the definition of the term “operations” and required reporting using an operating measure, received less favourable responses.

With the issuance of this standard, the FASB has decided to move forward with the phase one improvements and has deferred the phase two considerations.

On August 18, 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-14 as the first phase of a project designed to improve the presentation of not-for-profit financial statements, and also provide more useful information to the users of not-for-profit financial statements. It 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.

Main Provisions of this Update

The main provisions of this update amend the requirements in FASB Topic 958, Not-for-Profit Entities, specifically related to financial reporting. The new standard doesn’t change how transactions are accounted for, just how they are presented in the financial statements. This standard stipulates the following requirements for all not-for-profit entities:

• Reducing net asset classes from three to two (“with donor restrictions” and “without donor restrictions”) on the statement of financial position and statement of activities
• If presenting the direct method cash flow statement, an indirect reconciliation is no longer required (use of indirect or direct method is still optional)
• Provide enhanced disclosures about:
• Amounts and purposes of governing board designations and appropriations
• Composition of net assets with donor restrictions
• Quantitative and qualitative disclosure of how the not-for-profit entity will manage its liquid resources to cover general expenditures over the next year
• Amounts of expenses presented in natural and functional classifications
• Methods of how the not-for-profit entity allocated costs among program and support services
• Underwater endowment funds to be classified within net assets with donor restrictions, rather than without donor restrictions (formerly unrestricted)
• Investment return will be required to be netted with external and direct internal investment expenses
  • Investment expenses would no longer be required to be disclosed (including on the statement of functional expenses); and
  • Investment return makeup would no longer be required to be disclosed in an endowment schedule
• Capital campaign restricted donations will be released to unrestricted when the asset is placed in service, rather than as assets are purchased

Current Status

Phase 1

Phase 1 was completed with the issuance of ASU 2016-14, and focused on issues that were not dependent on other projects and were considered to be finalized in the near-term.

The amendments in this update will be effective for annual financial statements issued for fiscal years beginning after December 15, 2017, and for interim periods within fiscal years beginning after December 15, 2018. Early application of the amendments of this update is permitted. The amendments in this update should be applied retrospectively in the year the update is first applied (meaning for all years presented in the financial statements the first year the update is applied).

Phase 2

Deliberations on phase 2 of this project have not begun.

Phase 2 will focus on issues that will take more time since other proposals need to be considered.

Phase two will continue to be in re-deliberation and may require a significant amount of time before further decisions can be made on this phase of the project.

Phase two of the not-for-profit financial statement project will probably not come to fruition for several more years.

b. Phase two of the project included two other objectives other than operating measure component. They were :- requirement of direct method of cash flow and realligning the certian items of cash flows.

The whole project aimed at net assets classification, and proper disclosure on resources and investments.

In the second phase, the FASB will consider the following topics:

• Requiring an intermediate measure of operations (operating vs. non-operating)
• Defining the components of operations
• Requiring the direct method for the statement of cash flows
• Realigning certain items on the statement of cash flows to be more consistent with the intermediate measure of operations

Till now, nothing has been heard on the proposals of phase 2 of thr project.

c. Yes, I think that the proposed changes will improve the financila reporting.

It will reduce the certain costs and complexities in preparing the financial statements.

By simplifying the face of the financial statements and enhancing the disclosures in the notes, not-for-profits will provide more relevant information about their resources and the changes in those resources.

This will be helpful to users, such as donors, grantors, creditors, and others in assessing a not-for-profit’s:

• Availability of resources to meet cash needs for general expenditures
• Liquidity and financial flexibility
• Financial performance
• Service efforts and ability to continue providing services
• Execution of stewardship responsibilities and other aspects of its management’s performance.