In August of 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-14, the first major change in nonprofit reporting in more than 25 years. Last month, we provided a brief overview of the ASU. This month, we will discuss the changes specific to the statement of cash flows, and how this portion of the ASU can be implemented in your organization.
Although ASU 2016-14, Presentation of Financial Statements of Not-for-Profit Entities, includes major changes to nonprofit financial reporting, the statement of cash flows is minimally impacted by this update. Nonprofits still have the liberty to prepare the statement of cash flows using either the direct method or the indirect method of reporting cash flows from operations. The major change related to cash flows in this update is that nonprofits who elect to use the direct method are no longer required to reconcile the change in net assets to net cash provided by (used in) operating activities. FASB concluded that removing the requirement to prepare the reconciliation when the direct method is applied might encourage more nonprofits to choose the direct method of reporting cash flows.
The direct method provides a more accurate picture for users of an organization’s cash flow situation than the indirect method as some specific cash flow items are difficult to identify when using the indirect method. By lifting the requirement to prepare the additional reconciliation under the direct method, many nonprofits may prefer to elect the direct method to create a better and more accurate representation of their cash flows. In the end, both methods provide the same information, but in slightly different ways. It is up to each organization to determine which method proves the most beneficial.
In conclusion, ASU 2016-14 lays out some sweeping changes to the ways that nonprofit organizations prepare their financial statements. The statement of cash flows, however, is just one piece of this change. In September and October, we will discuss how ASU 2016-14 updates reporting requirements for net assets and functional expenses.
Nonprofit organizations are required to adopt the changes for fiscal years beginning after December 15, 2017.
For general questions or additional support about implementation, feel free to contact Kristi Yanover, Audit Partner, at firstname.lastname@example.org, or any member of our Accounting & Assurance Team.