Are you responsible for preparing not-for-profit financial statements? If so, buckle your seatbelt — because changes are ahead for ASC 958.

The FASB wants to improve financial reporting for not-for-profit organizations, so it created the proposed FASB Accounting Standards Update (ASU), Not-for-Profit Entities and Health Care Entities: Presentation of Financial Statements on Not-for-Profit Entities. To understand more about the motives driving these changes, check out these two short videos. But in a nutshell, the FASB hopes to improve:

• Net asset classification requirements
• Information provided to financial statement users about liquidity, financial performance and cash flows

Solid ideas, in theory. But, when the FASB shared its ASU Exposure Draft, the public response was not pretty. People responded with tons of questions and raised numerous issues about the changes.

In fact, the outcry was strong enough that the FASB decided to divide its review of the proposed ASU into two phases:

• Phase 1 (the faster fixes) – focuses on proposed changes that do not depend on other projects and can finalize in the near term.
• Phase 2 (the tougher changes) – involves proposed changes that result from public comment and will take more time to resolve.

The FASB met in December 2015 and reached a number of tentative decisions related to Phase 1 — changes that will affect not-for-profit financial statements. And while the changes might be tentative, if you prepare these statements, you need to start paying attention now.

So what exactly did the FASB tentatively decide?

TOPIC 1: CASH FLOW STATEMENTS

Under the proposed ASU, not-for-profit entities can still present operating cash flows using either the direct or indirect method. However, if your not-for-profit uses the direct method, you no longer have to reconcile to get back to the operating cash flows under the indirect method.

TOPIC 2: NET ASSET CLASSIFICATION

The FASB made tentative decisions on the following issues:

1. Moving to Only Two Net Asset Classes

Not-for-profit entities will now only have two net asset classes:

• Net assets with donor restrictions: A combined category for temporarily and permanently restricted net assets
• Net assets without donor restrictions: The new name for unrestricted net assets

The FASB believes that this alternative still satisfies the requirement to provide relevant information about the nature and amounts of donor restrictions on net assets, either on the face of the statement of financial position or in the notes, as is currently required under U.S. GAAP.

2. Disclosing the Amount and Purpose of Board-Designated Assets

Not-for-profit entities will now have to disclose the amount and purpose of board-designated net assets, either on the face of the financial statement or in the notes.

3. Classifying and Disclosing Underwater Endowments

If an endowment fund is “underwater” (i.e., its current market value is less than its original value), the not-for-profit entity must disclose the aggregate amount by which it is underwater within “net assets with donor restrictions.”

In this scenario, the ASU would also require the entity to disclose its:

• Policy to either reduce expenditures or not spend from the endowment fund
• Aggregate fair value
• Aggregate original endowment gift amount or level that donor stipulations or the law require it to maintain
• Aggregate deficiency amount

4. Using the Placed-In-Service Approach for Restriction Expirations to Acquire or Construct Long-Lived Assets

This tentative decision answers a tricky question not-for-profit entities may face: How should you present assets donated to acquire or construct long-lived assets when there are no explicit donor instructions?

The FASB eliminated the over-time approach and moved forward with requiring the placed-in-service approach for restriction expirations to acquire or construct long-lived assets. As a result, when you place the long-lived assets into service, you can reclassify the amount from “Net assets with donor restrictions” to “Net assets without donor restrictions.”

These changes are just the beginning. The FASB plans to continue ASU Phase 1 revisions at its next board meeting tentatively planned for January 27, 2016. Topics up for deliberation include the proposed requirement that not-for-profit entities provide users with additional quantitative and qualitative information in order to assess liquidity. Until then, everyone is left pondering how these tentative decisions will affect financial reporting for not-for-profit entities.

You can keep up with the latest developments of the project by reviewing the FASB’s project page, but you don’t have to go it alone. Contact us if you have any questions or want to make sure you’re prepared for the pending changes.