In August 2016, the Financial Accounting Standards Board (FASB) finalized its guidance for the presentation of financial statements for not-for-profit organizations. The modifications take effect for fiscal years beginning after December 15, 2017 (i.e., years ending December 31, 2018, June 30, 2019, etc.).
Organizations should be getting to know the new requirements now, as the changes may significantly affect their reporting processes. Our Presenting the New Not-for-Profit Financial Statement series examines segments of the new standard in more detail. This installment delves into the changes to the presentation of operating cash flows and investment returns.
Operating Cash Flows
Presentation of operating cash flows numbered among the many areas targeted for improvement in not-for-profit financial statements. The FASB wanted to improve reporting of operating cash flows so that the statement of cash flows would be easier for financial statement users to understand.
Current U.S. Generally Accepted Accounting Principles (GAAP) allow not-for-profit organizations to use either the direct method or the indirect method to report the net amount of their operating cash flows. Those that elect to use the direct method must present or disclose a reconciliation to the net amount of their operating cash flows using the indirect method. In practice, this means entities using the direct method are required to report operating cash flow information in two formats.
In the exposure draft of changes in ASU 2016-14, the FASB proposed requiring organizations to use the direct method of reporting their operating cash flows. Feedback on the exposure draft led the FASB to modify its requirement in the final standard. Under the final standard, not-for-profit organizations will still be able to choose to use either the direct method or the indirect method to report the net amount of their operating cash flows, depending on which approach makes the most sense for the organization, its creditors and its stakeholders.
The FASB has also removed the requirement for entities using the direct method to perform a reconciliation to the indirect method. Eliminating the reconciliation requirement should reduce the complexity and cost for entities using the direct method for their cash flows.
Not-for-profits use several different approaches for managing investments. Some may handle investment activities internally, while others work with an external investment manager. Other not-for-profits may exclusively use investment vehicles such as mutual funds that have management fees embedded in investment returns. The variety in the types of not-for-profit investments made comparing investment activities between organizations complicated.
Under the final changes in ASU 2016-14, not-for-profits will report investment return net of external and direct internal investment expenses on the face of the Statement of Activities. The current requirement to disclose the netted expenses has been eliminated. The FASB designed the change to increase comparability between not-for-profit organizations.
In the next installment of our not-for-profit financial statement series, we will be taking a closer look at changes designed to enhance liquidity understanding.
If you have any comments, questions or concerns about the changes to cash flows or investment returns, please contact us.
Michelle Spriggs is a Shareholder in the Not-For-Profit & Education Practice. She can be reached at 774.206.8336 or MSpriggs@cbiztofias.com.
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