In April 2015, the Financial Accounting Standards Board (“FASB”) issued Proposed Accounting Standards Update (ASU) No. 2015-230, Not-for-Profit Entities (Topic 958) and Health Care Entities (Topic 954): Presentation of Financial Statements of Not-for-Profit Entities. One of the most controversial items in the ASU was the requirement that not-for-profit organizations would be required to present their statement of cash flows using the direct method.
The FASB received comments that requiring the use of the direct method would cause significant challenges. Not-for-profit organizations felt that it would be difficult for readers of their financial statements to make comparisons with for-profit companies who would not be required to use the direct method. The second common complaint came from smaller not-for-profits who felt that using the direct method would cause them to incur significant costs, either internally or by increased costs from their outside accountants.
As a result, on December 11, 2015, the FASB made the decision it would not require not-for-profit organizations to use the direct method, but would give them the option to use the direct method or the indirect method. This was not the FASB’s only change. Currently, U.S. generally accepted accounting principles (GAAP) allows for a choice between using the direct method or the indirect method. If the direct method is chosen, the indirect method must also be presented. The FASB has decided it would no longer require the presentation of the indirect method if an organization chooses to present their statement of cash flows under the direct method.
The FASB also clarified a few other items in the ASU. The FASB had previously decided to reduce the number classifications of net assets from three to two. They officially decided the two new classifications will be called “net assets with donor restrictions” and “net assets without donor restrictions.” In addition, the FASB will require the purpose of board-designated net assets to be disclosed either on the face of the financial statement or in the notes. The FASB also is requiring the aggregate amount that endowment funds are underwater be included in net assets with donor restrictions and is requiring enhanced disclosures about the underwater endowment funds.