WHY DID THE FASB ISSUE A NEW STANDARD ON NOT-FOR-PROFIT FINANCIAL REPORTING?

On August 18, 2016, the FASB issued a standard intended to simplify and improve how a not-for-profit organization classifies its net assets, as well as the information it presents in financial statements and notes about its liquidity, financial performance, and cash flows. 

The current not-for-profit financial reporting model has held up well for over 20 years since the issuance of Statement of Financial Accounting Standards No. 117, Financial Statements of Not-for-Profit Organizations, in 1993. However, stakeholders voiced concerns about:

• Complexities in the use of the required three classes of net assets
• Deficiencies in the transparency and utility of information in assessing an organization’s liquidity
• Inconsistencies in the type of information provided about expenses, and
• Misunderstandings about and the limited usefulness of the statement of cash flows, particularly with regards to the reporting of operating cash flows.

Based on these concerns, the FASB’s Not-for-Profit Advisory Committee and other stakeholders suggested that an update would be beneficial.
The FASB added a project to its agenda to improve the current net asset classification requirements and the information presented in financial statements and notes about a not-for-profit entity’s (NFP’s) liquidity, financial performance, and cash flows.