Project Update

Financial Statements of Not-for-Profit Entities
(Project was renamed after the project on Not-for-Profit Financial Reporting: Other Financial Communications was removed from the Board's technical agenda.)

Last updated on September 3, 2014. Please refer to the Current Technical Plan for information about the expected release dates of exposure documents and final standards.


(Updated sections are indicated with an asterisk *)


The staff has prepared this summary of Board decisions for information purposes only. Those Board decisions are tentative and do not change current accounting. Official positions of the FASB are determined only after extensive due process and deliberations.

Project Objective(s)
*Decisions Reached at Last Meeting
*Summary of Decisions Reached to Date
*Next Steps
*Board/Other Public Meeting Dates
Background Information
Contact Information

Project Objective(s)

The objective of this project is to reexamine existing standards for financial statement presentation by not-for-profit entities (NFP), focusing on improving:

  1. Net asset classification requirements
  2. Information provided in financial statements and notes about liquidity, financial performance, and cash flows. 
An April 2012 podcast outlines the objectives of this project and a related research project, Not-for-Profit Financial Reporting: Other Financial Communications.

*Decisions Reached at Last Meeting (August 27, 2014)

The Board continued its initial deliberations, focusing on whether to require NFPs to disclose the following information:

Salaries and Benefits Expense


The Board previously decided to require an NFP to report investment returns net of external and direct internal investment expenses and, for practical reasons, to no longer require disclosure of investment-related expenses that have been netted against investment revenues. To address concerns about the potential loss of relevant salary and benefit-related information, the Board decided that an NFP would disclose the amount of internal salaries and benefits, if any, that have been netted against investment return.

Cost-Allocation

The Board decided that notes to financial statements should include a description of the method used to allocate costs among program and support functions. The Board also decided to refine the Codification’s definition of management and general activities and to provide additional implementation guidance to better depict which support costs should be allocated among program and/or support functions.

Tax-Exempt Status

The Board affirmed its previous decision not to require an NFP to disclose its tax-exempt status; thus, a business-oriented NFP health care entity would no longer be required to disclose its tax-exempt status in accordance with paragraph 954-740-50-1.

*Summary of Decisions Reached to Date (August 27, 2014)

Statement of Activities

Net Asset Classes


The Board tentatively decided to replace the existing requirements of paragraphs 958-225-45-1 to present the change in each of three net asset classes on the face of a statement of activities with similar requirements for two classes of net assets: with donor-imposed restrictions and without donor-imposed restrictions. The Board also decided to make conforming changes to the terminology and definitions of the net asset classes.

Related disclosures

The Board also tentatively decided to retain the current requirement to provide information about the nature and amounts of different types of donor-imposed restrictions but modify the requirement to (a) remove the hardline distinction between temporary restrictions and permanent restrictions and (b) instead focus on describing differences in the nature with a focus on both how and when the resources (net assets) can be used. To address potential loss of information, the Board also decided to require disclosure of information about the amount and purposes of board designations of net assets without donor-imposed restrictions.

Intermediate Measure of Operations, including Presentation Requirements and Flexibility

Definition

An NFP would be required to present an intermediate measure of current operations that is defined by two key dimensions: mission and availability.

  1. The mission dimension is based on whether resources are from or directed at carrying out an NFP’s purpose for existence.
  2. The availability dimension is based on whether resources are available for current period activities that reflect both external and internal limitations.

Implementation Guidance

Guidance for the mission dimension would note that (a) all gifts result from carrying out the NFP's activities but are not necessarily available for current period activities, (b) all legally available mission-related revenues are to be presented before reductions for amounts designated by the governing board for use in future periods (rather than only the net of those amounts), (c) investing and financing activities, other than those directed at carrying out the NFP’s programs, would not meet the mission dimension (and thus fall outside of the intermediate measure of operations). Investing and financing activity directed at carrying out the NFP’s programs, sometimes referred to as programmatic investing, would include items such as interest earned on an educational institution’s student loans, a foundation’s subsidized loans to support grantees, and similar lending directed at achieving the NFP’s purposes.

Guidance for the availability dimension would note that (a) external limits often result from donor-imposed restrictions that limit the availability of donated resources for current period use until those restrictions are met and (b) internal limits often result from actions of an NFP’s governing board to designate resources for specific (limited) purposes or future periods and similar actions (see below) that effectively make resources unavailable for current operations.

Similar actions would include placing a gift of a long-lived asset in service (rather than selling it), which effectively results in the entity making all or a portion of the asset’s economic benefit unavailable for current operations. The guidance would note that in that case an NFP would report a transfer out of current operations for the amount of the gifted long-lived asset expected to be utilized in future periods. In subsequent periods, the NFP would report transfers back into current operations to the extent long-lived assets are utilized during the current reporting period. Those transfers are sufficiently different from governing board designations and should be presented discretely.

The forthcoming Exposure Draft will include a question about whether the benefit of reporting all capital-like gifts consistently outweighs the potential reduction in both costs and complexity for users if small or ongoing capital-like gifts were not subject to the requirement to report transfers out of and subsequently back to operations.

Presentation Requirements and Flexibility

An NFP would be permitted, but not required, to report any specific subtotal before the intermediate measure of operations. For example, business-oriented health care providers would be permitted, but no longer required, to present the performance indicator that is currently required by paragraph 954-225-45-4. The Board tentatively decided that an NFP would continue to be allowed to use a one- or two-statement approach to present all of the revenues, expenses, gains, losses, and other events that change net assets or classes of net assets for the period. Furthermore, the Board tentatively decided that NFPs reporting an intermediate measure of operations no longer would be required (under paragraph 958-225-45-10) to report that measure in a statement that also reports the change in unrestricted net assets for the period. Accordingly, if desired, the first statement could end with the intermediate measure of operations when using a two-statement approach.

Expiration of Restrictions

The Board decided to require that an NFP use the placed-in-service approach for the treatment of expiration of restrictions related to long-lived assets, thus eliminating the option to release the donor-imposed restriction over an asset’s estimated useful life.

Reporting of Expenses

The Board tentatively decided to require an NFP to report expenses by their nature and retain the requirement to report expenses by their function. The Board also decided to require an NFP to provide an analysis of expenses by function and by nature in one location—in the statement of activities, a separate statement of expenses (currently called a statement of functional expenses), or a schedule in the notes. Investment expenses that are netted against investment return need not be included and other nonoperating expenses (for example, interest and other financing expenses) need not be functionalized. Although this analysis typically would be provided in the form of a matrix, that specific format would not be required.

The Board also tentatively decided to require an NFP to include a description of the method used to allocate costs among program and support functions. To promote comparability, the Board also will refine the definition of management and general activities and include additional illustrative guidance to better depict which types of costs should be allocated among functions.

Investment Return

The Board tentatively decided to require an NFP to include a net presentation of investment expenses against investment return on the face of the statement of activities. An NFP would be required to net external and direct internal investment expenses against the investment return. The Board tentatively decided to remove the requirement in paragraph 958-225-50-1 that an NFP entity disclose the amount of investment-related expenses netted against investment revenues if that amount is not disclosed on the face of the statement of activities. However, the Board also decided to require the disclosure of the amount of internal salaries and benefits, if any, that have been netted against investment return.

Statement of Financial Position

The Board tentatively decided to replace the existing requirements of paragraphs 958-210-45-1 to present the change in each of three net asset classes on the face of a statement of financial position with similar requirements for two classes of net assets: with donor-imposed restrictions and without donor-imposed restrictions. The Board also decided to make conforming changes to the terminology and definitions of the net asset classes.

Related Disclosures

The Board also tentatively decided to retain the current requirement to provide information about the nature and amounts of different types of donor-imposed restrictions but modify the requirement to (a) remove the hardline distinction between temporary restrictions and permanent restrictions and (b) instead focus on describing differences in the nature with a focus on both how and when the resources (net assets) can be used. To address potential loss of information, the Board also decided to require disclosure of information about the amount and purposes of board designations of net assets without donor-imposed restrictions.

Statement of Cash Flows

The Board tentatively decided to improve the statement of cash flows by requiring the direct method of reporting cash flows provided (used) by operating activities and removing the requirement to reconcile the change in net assets to net cash flows from operating activities (often referred to as the indirect method). The Board also decided to revise the following cash flow classifications to better align them with the tentative decision for an intermediate measure of operations:

  1. Cash gifts with donor-imposed restrictions that they be used to purchase, construct, or otherwise acquire long-lived assets for operating purposes from financing to operating
  2. Cash payments to purchase, construct, or otherwise acquire long- lived assets for operating purposes from investing to operating
  3. Cash proceeds from the sale of long-lived assets from investing to operating
  4. Cash dividends and interest income from operating to investing
  5. Cash payments of interest expense from operating to financing.

Other Note Disclosures

Liquidity

The Board tentatively decided that an entity should define the time horizon it uses to manage its liquidity (for example, 30, 60, or 90 days) and disclose quantitative and qualitative information that is useful in assessing liquidity. The quantitative information includes (a) the total amount of financial assets, (b) the amounts that are not available to meet cash needs within the time horizon due to various limitations, and (c) the total amount of financial liabilities that are due within that time horizon. In addition, the qualitative information would allow users to understand how the entity manages its liquidity. For example, the entity might disclose its strategy for addressing entity-wide risks that may affect liquidity, including its use of lines of credit, policy for establishing liquidity reserves, and/or basis for determining the time horizon used for managing liquidity.

Underwater Endowments

The Board decided to require that so-called underwater amounts should be reported within the proposed with donor restrictions class of net assets (rather than within unrestricted net assets as currently required). The underwater amount is the amount by which the fair value of an individual donor-restricted endowment fund is less than the original gift amount or level required by donor stipulations or law. An NFP entity also would be required to disclose the following information:

  1. The board’s policy or decision on whether to reduce or not spend from underwater endowment funds
  2. Original gift amount (or level required by donor stipulations or law) of underwater endowment funds in the aggregate
  3. Fair value of underwater endowment funds in the aggregate.
Other
  1. The Board directed the staff to develop more streamlined examples of note disclosures that meet current GAAP requirements, particularly for the intersection of requirements surrounding investments, endowment net assets, and fair value levels.
  2. The Board tentatively decided to no longer require business-oriented NFP health care entities to disclose their tax-exempt status in accordance with 954-740-50-1.

*Next Steps

The main upcoming topics are:

  1. Clarification of issues related to treatment of donor-restricted gifts to acquire long-lived assets and related capital-like transactions and events
  2. Providing guidance for implementation issues that may arise, such as presentation and classification of equity transfers among affiliated entities, noncontrolling interests in subsidiaries, excise taxes on net investment income of foundations and changes in beneficial interests in trusts managed by others.
  3. Discussion of benefits, costs, and complexities of the tentative decisions as a whole package, which is scheduled for discussion with the Not-for-Profit Advisory Committee on September 4 and 5 and with the Board on October 8.

*Board/Other Public Meeting Dates

The Board meeting minutes are provided for the information and convenience of constituents who want to follow the Board’s deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings. Decisions become final only after a formal written ballot to issue a final standard.

*August 27, 2014 Board Meeting—Note Disclosures on Salaries and Benefits Expense, Cost-Allocation, and Tax-Exempt Status
July 23, 2014 Board Meeting—Capital-Like Transactions; Intersection of NFPFS Project with Financial Performance Reporting Research Project
June 18, 2014 Board Meeting—Clarification of the Board’s Tentative Decision: Presentation and Disclosure of Investment Expenses; Capital-Like Transactions; Note Disclosures of Not-for-Profit Entities
May 28, 2014 Board Meeting—Presentation and Disclosure of Information about Liquidity
May 14, 2014 Board Meeting—Presentation and Disclosure of Investment Expenses, Foundation Outreach, and Health Care Outreach and Performance Indicator
March 12, 2014 Board Meeting—Presentation and Disclosure of Liquidity
February 26, 2014 Board Meeting—Presentation of Revenues, Expenses, and Other Changes in Net Assets; Presentation and Disclosure of Investment Expenses
December 18, 2013 Board Meeting—The Statement of Functional Expenses
December 11, 2013 Education Session—The Statement of Functional Expenses
October 23, 2013 Board Meeting—The Statement of Cash Flows
October 2, 2013 Education Session—Liquidity and The Statement of Cash Flows
September 4, 2013 Board Meeting—Net Asset Classes: Classification and Disclosure Requirements
May 29, 2013 Education Session—Net Asset Classes: Background, Stakeholder Concerns, Plans for Revisiting the Net Asset Classes
May 29, 2013 Board Meeting—Operating Measure: Definition and Presentation
May 15, 2013 Education Session—Operating Measure: Definition (cont.)
March 28, 2013 Education Session—Operating Measure: Definition (cont.)
January 31, 2013 Education Session—Operating Measure: Background, Objectives, Definition
June 6, 2012 Board MeetingProject Plan 
May 16, 2012 Education Session—Handout 
November 9, 2011 Board Meeting—Agenda Announcement

Background Information

On November 9, 2011, the FASB chairman announced (press release) the addition of two agenda projects—this standards-setting project and a research project (Not-for-Profit Financial Reporting: Other Financial Communications)—intended to improve financial reporting of not-for-profit entities. The objectives of these projects encompass suggestions received by the Board from its Not-for-Profit Advisory Committee (NAC) at the Committee’s September 2011 meeting. The staff discussed the plans and approach for both projects with the NAC at its March 2012 and September 2012 meetings. Subsequent and ongoing discussions are held with members of the project resource group as well as members of NAC. The NAC page contains handouts and minutes from the NAC meetings.

On January 29, 2014 Agenda prioritization meeting, the Board voted to remove Not-for-Profit Financial Reporting: Other Financial Communications project (press release). This decision and potential alternatives were discussed with NAC at its March 2014 meeting.

Contact Information

Ronald J. Bossio
Senior Project Manager
rjbossio@fasb.org

Richard Cole
Project Manager
racole@fasb.org

Karlene Tipton
Postgraduate Technical Assistant
kjtipton@fasb.org

Andrea Willette
Postgraduate Technical Assistant
amwillette@fasb.org