New non-profit reporting standard may mean big changes on the horizon

Could for-profit entities be next?

As the August 20th deadline for public comments draws near, those outside the not-for-profit (NFP) space may want to focus attention on the FASB’s proposed Accounting Standards Update on NFP financial reporting.  The proposed update would dramatically change several important aspects of NFP reporting, particularly the determination and presentation of “operating” activities.  However, given the FASB has similar projects on their agenda for business entities, those entities may also want to consider weighing in before the deadline.

As the FASB explained, the proposed rule aims to fix “inconsistencies in the reporting…of intermediate measures of operations in the statement of activities, including inconsistencies between that reporting and the reporting of operating cash flows in the statement of cash flows.” 

 To do so, the proposed rule would require NFPs to present specific subtotals on the statement of activities.  This is a novel concept: except for healthcare NFPs, NFPs currently have flexibility in how they report operating results, if they choose to report an operating measure at all.  Now all NFPs, including healthcare NFPs, must report these two subtotals. 

 The heart of this new approach is a new definition of “operating activity.”  Today, distinguishing operating from non-operating items requires determining whether activities or transactions are “ongoing major or central” to a NFP’s operations. The proposed standard changes that, requiring instead a determination based on two dimensions: mission and availability.  

To further help align the reporting of operating activities and operating cash flows, the proposed standard would require NFPs to use the direct method of cash flow reporting and would change the classification of certain cash flows to be consistent with the operating activities on the statement of activities (e.g. acquisition of property, plant and equipment it would be operating). 

As PwC’s recent Point of view piece explains, the proposed standard requires a different conceptual approach to how NFPs present their financial information.  And, it also has potential for far wider implications because of other FASB projects.

First, consider that the FASB has generally sought to minimize the differences in reporting between NFPs and for-profits except where warranted by NFPs’ unique transactions and characteristics. Second, the FASB has two current research projects related to financial reporting for for-profits: one that seeks, among other things, to develop frameworks for defining an operating performance metric; and one that will consider cash flow classification for business entities.  Seem familiar to the proposed standard for NFPs? Might the NFP standard foreshadow what’s coming for for-profits? Yes and yes. 

Thus, not only should NFPs consider commenting and reading themselves for the major changes on their way – for-profits should consider the proposed standard’s potential effects on their reporting and consider commenting as well.

For further reading, view PwC’s In brief: FASB exposure draft proposes dramatic changes for not-for-profit (NFP) entities.