Are You ready for Change? FASB Proposes Accounting Overhaul for Nonprofits

In April 2015, the Financial Accounting Standards Board (FASB) proposed new accounting standards that, if finalized, will fundamentally alter the way nonprofits prepare their financial statements. The proposed update, No. 2015-230, Not-for-Profit Entities (Topic 958) and Health Care Entities (Topic 954): Presentation of Financial Statements of Not-for-Profit Entities, is intended to address what FASB considers unnecessary complexities and inconsistencies in current nonprofit financial reporting.

According to FASB member Lawrence W. Smith, the changes will "make not-for-profit financial statements even more useful to donors, lenders, and other users." Not everyone is expected to agree with his assessment, and FASB has invited nonprofits and concerned individuals to comment on its draft by August 20. Here's an overview of what could end up being the biggest update of nonprofit accounting standards in more than two decades.

Key Provisions

The update makes several significant proposals relating to:

Asset classes. Currently, nonprofits classify net assets as unrestricted, temporarily restricted or permanently restricted. FASB would reduce these three categories to two — net assets subject to donor restrictions and net assets without donor restrictions. In effect, the change would eliminate the distinction between temporarily and permanently restricted net assets.

Statement of activities presentation. Organizations would be required to segregate revenues and expenses related to their mission (or operating activities) from other activities. Such other activities include investment income and board designations that place or remove organization-imposed limits on resources, making them unavailable for current period operating activities.  Nonprofits would have to report such income net of external and direct internal investment expenses. All activity would further be separated into the two classes of net assets described above.

Classification of expenses. All nonprofits would have to summarize expenses by natural classification, such as salaries and rent, as well as by function or program. This grid-style information could be presented in an additional statement, on the face of the statement of activities or in a footnote.

Cash flows. Nonprofits would be required to use the direct (as opposed to the indirect) method of stating cash flows. The direct method involves separate reporting of cash receipts and payments tied to operating activities.

Cash flow classifications. Changes would be made in the classification of some transactions. Purchases and sales of, as well as contributions for, long-lived assets move from investing to operating cash flow items. Interest payments move from operating activities to financing activities. Investment income — other than for loans or investments made for programmatic purposes — generates investing cash flows.

Expirations of certain restrictions. To report the expiration of restrictions on a gift to be used to acquire or construct a long-lived asset, organizations would be required to use the placed-in-service approach. This would replace the method of releasing donor restrictions over the estimated useful life of the gift.

Underwater endowment funds. Donor-restricted endowments for which the fair value is less than either the original gift amount or the amount that is required to be maintained — otherwise known as underwater endowment funds — would have to be fully reported in net assets with donor restrictions. (Currently the underwater amount of an asset is reported in the unrestricted category.) Nonprofits would also need to disclose the original gift amount or level required to be maintained and their board's policy on spending such funds.

Liquidity. Organizations would be required to disclose both quantitative and qualitative information about liquidity and explain how it's being managed.

Question of Time

If approved, FASB's accounting standard changes will go into effect on a retrospective basis.  The board is still determining whether new standards would apply to all nonprofits at the same time and whether some organizations would be allowed to adopt them early.

In the meantime, to review FASB's proposal as well as questions for respondents, visit And be sure to voice your opinion by August 20.

Where's the GAAP?

In its Accounting Standards Update (ASU) 2015-230, the Financial Accounting Standards Board (FASB) acknowledges that new proposed standards are reasonably different from current Generally Accepted Accounting Principles (GAAP) — and that initial compliance with the rules could be challenging. Officially, however, FASB believes that the benefits, including greater transparency and clarity of financial statements, outweigh the costs.

Unofficially, there's some dissent, even among FASB board members. In fact, FASB's own chairman Russell Golden has expressed concern that some aspects of the new standard should be studied on a global level because they address issues for nonprofits that also apply outside the nonprofit sector.

Higher education finance officers have also spoken up. In March, a group told FASB that certain proposals — those that reduce net asset classes to two and that require nonprofits to present a uniform measure of operations — would be hard for them to follow.

For additional information or to discuss this article further, please contact Thomas Dartnell, CPA and Not-for-Profit Partner on 973-328-1825 or