Spring 2014 issue of Horizons

NOT-FOR-PROFIT

Cash Flow Statement Challenges

The two-page format places more emphasis on current operating activities and facilitates multi-year comparisons, but movements between operating and nonoperating may lack transparency and hinder understandability. Net Asset Classifications and Liquidity Challenges A question has been raised as to whether the existing three net asset classes, focused on donor restrictions, are still relevant and appropriate or whether this classification scheme could be improved. Would financial statement users be better served by a scheme that focuses primarily on other distinctions, such as operating/ nonoperating, current/noncurrent, and/or operating/endowment/plant, and secondarily on external restrictions (including, but perhaps not limited to, donors) versus internal limitations? Tentative Decisions & Remaining Deliberations Tentatively, a decision has been made to replace the current requirements to present three classes of net assets with similar requirements for only two classes of net assets: “with donor imposed restrictions” and “without donor imposed restrictions.” The current requirement to provide information about the nature and amounts of different types of donor-imposed restrictions will be retained, although modified. Required disclosures would also include information about the amount and purposes of board designations of net assets “without donor imposed restrictions.” The issue of better presenting liquidity has not been resolved. Net asset classifications alone are deemed insufficient. FASB continues to look at the statement of financial position and/or the notes to the financial statements as potential sites for enhanced information regarding a NFP’s liquidity. Further, how can information about liquidity be improved?

The basic issue is whether the statement of cash flows can be improved. Second, can it be better linked to the statement of activities or operations?

Should the direct method for presenting cash flows from operations be required?

Tentative Decisions The board is recommending that the direct method of presenting operating cash flows be required; the indirect method/ reconciliation would no longer be required.

Along with this, certain components of cash flow classes would be revised such as:

∙ Interest and dividends received would be considered investing cash flows rather than operating cash flows. ∙ Interest paid would be reported as a financing activity, not an operating activity. ∙ Construction/acquisition and purchases of long-lived assets, and proceeds of gifts for such, would be classified as an operating activity, rather than investing/financing activities. Other Potential Statements or Required Schedules Challenges Currently, only voluntary health and welfare organizations are required to present a statement of functional expenses. Other NFPs are required to present expenses by function (on the face of the statement of activities or within the footnotes) but are not required to report expenses by natural classification.

Should all NFPs be required to present expenses by nature and function?

page 60 | horizons Spring 2014