Under the proposal, NAC has targeted improvements to the current net asset classification requirements and information presented in financial statements regarding a not-for-profit’s liquidity, financial performance, and cash flows. Specifically, the changes are intended to:
- Reflect more clearly financial performance in the statement of activities by introducing two measures of operating performance that show available amounts that have been generated by or directed, at carrying out the mission of the not-for-profit in the current period, both before and after any governing boards actions affect the availability.
- Simplify the existing net asset classification scheme by replacing the three existing net asset classes (permanently restricted, temporarily restricted, and unrestricted) with two net asset classes (net assets with donor restrictions and net assets without donor restrictions).
- Enhance information in the notes to help not-for-profit financial statement users better assess a not-for-profit’s liquidity and how it is being managed. More specifically, the proposal would require the disclosure of both quantitative and qualitative information about the liquidity of assets and near-term demands for cash as of the reporting date.
- Introduce requirements to report operating expenses by their nature and function, making information more comparable and useful for the reader of the financial statements. Additionally, investment return would be reported net of related expenses on the face of the financials.
- Lastly, make the statement of cash flows more understandable by allowing the direct method of presenting cash flows provided by operating activities, rather than requiring the use of the indirect (reconciliation) method, as well as classifying cash flows in ways that are more consistent with classifications in the statement of activities.
For additional information regarding the details and status of the proposed changes, please contact your L&B professional at 858-558-9200. Visit the Financial Accounting Standards Board website using the link here.