As part of the new Accounting Standards Update 2016-14 (ASU), the Financial Accounting Standards Board (FASB) set out to not only improve the presentation of financial statements for not-for-profits (NFPs), but to allow for more flexibility and consistency across the industry. Two parts of the new ASU provide just that.
Presentation of Investment Returns
Major Changes
All investment expenses, both direct internal and external, are required to be netted with investment returns on the face of the financial statements. There will be no effect to the bottom line of the financial statements. This change eliminates the previously required disclosure that breaks out the components of the investment returns, if investment expenses were being netted into that amount on the face of the financial statements.
Benefits
This new presentation will provide consistency and easier comparability among the NFPs; whether they are using internal investment managers or have hired external investments groups for managing their investments. Additionally, this change provides a cost savings to the NFP, as this eliminates the added resources needed to determine embedded fees with investments held by external managers and eliminates the additional disclosure requirement for the netted investment expenses.
Presentation of Cash Flows
Major Changes
NFPs are allowed to present either a direct or indirect statement of cash flows in the NFP’s financial statements. However, if the NFP does a direct presentation, the reconciliation of changes in net assets to net operating cash flows (also known as the indirect method reconciliation), no longer needs to be presented.
Benefits
The change allows the NFP to use flexibility in determining which method provides the clearest picture of the NFP’s operating cash flows to the users of its financial statements. Likewise, if the NFP chooses to present the direct method, it will eliminate the added costs to present the additional indirect reconciliation and eliminate confusion as to the two different methods being used.
Overall Impact
Both of these new changes were put into place to make it easier for users to understand NFP financial statements. With the added benefits it provides the NFPs, these should be beneficial and welcomed changes for organizations as well.
