The FASB has proposed significant changes to the financial reporting model for not-for-profit entities. The proposal introduces a new concept of "operating" that would classify items as operating or nonoperating based on whether they arise from activities related to the organization's mission or are available for current use. It would require all non-profits to report an operating surplus/deficit subtotal and changes the classification of some cash flows. The proposal aims to standardize financial reporting for non-profits and more closely align statements of activities and cash flows. Public comments on the exposure draft are due by August 20, 2015.

1. FASB exposure draft proposes dramatic
changes for not-for-profit entities
What happened?
On April 22, the FASB issued an exposure draft of a proposed Accounting Standards
Update (ASU), Presentation of Financial Statements of Not-for-Profit Entities, which
would significantly change the existing not-for-profit financial reporting model. The
cornerstone of the proposal is a new conceptual approach to defining “operating activity.”
Items would be classified as operating or nonoperating in the performance statement
based on whether they arise from operating, investing, or financing activities. The
classification of certain items in the statement of cash flows would be changed to be more
consistent with the performance statement. A defined subtotal for operating activity
would be required for all not-for-profits.
A new concept of “operating”
The proposed approach to defining “operating” is a departure from traditional
operating/nonoperating distinctions. Today, the focus is on whether management
considers activities or transactions to be “ongoing major and central” to an entity’s
operations. Under the proposal, operating classification would be determined using new
“dimensions” of mission and availability. Mission considers whether resources result
from or are directed at carrying out the purposes or mission for which the not-for-profit
entity exists -- that is, providing goods and services to beneficiaries, customers, or
members. For example, because property and equipment is integral to carrying out an
entity’s mission, activities (and cash flows) associated with capital assets used in day-to-
day operations would always be reported as operating. Generic investing or financing
activities (for example, investment income not arising from core programs) would not
meet the “mission” dimension and thus, would always be nonoperating.
Availability considers whether resources are available for current period activities, based
on the presence or absence of limitations imposed by donor-restricted contributions or
by actions of an entity’s governing board (or in some cases, management). The
availability dimension also governs the treatment of contribution-related activity
associated with the acquisition of long-lived assets to be used in operations. Resources
restricted by donors for the acquisition of property and equipment would be released
from restriction within operations and then simultaneously transferred out of operations
when the property or equipment is placed in service.
New measure of operations
With the exception of not-for-profit health care entities, not-for-profits currently have
significant flexibility in how they reporting operating results, if they choose to report an
operating measure at all. Under the proposal, an operating excess (deficit) subtotal
would be required for all not-for-profits, including health care entities that today are
required to report a net-income equivalent “performance indicator.” Health care entities
would be able to continue to report their current performance indicator as an additional
non-GAAP measure, if desired.
No. US2015-12
April 24, 2015
At a glance
A new proposed
Accounting Standards
Update would represent
a significant change in
the not-for-profit
financial reporting
model.
National Professional Services Group | CFOdirect Network – www.cfodirect.pwc.com In brief 1

2. Movements of resources between operating and nonoperating categories (for example,
those associated with board designations of resources or for capital assets acquired
through donor-restricted gifts) would be accomplished using a new transfers category,
and the operating measure would be reported with and without the effect of the transfers.
Discontinued operations that occur during a period would be reported immediately
preceding the operating measure and separated by a subtotal.
Statement of cash flows
In effect, the proposal would create a separate cash flow reporting model for nonprofits.
Use of the direct method would be required. In order to drive closer alignment between
the notion of “operating” as used in statements of activities and statements of cash flows,
the proposal would change how certain cash flows are classified. For example, cash
payments to acquire property and equipment would be reported in operating cash
outflows, rather than as investing outflows. Similarly, dividends and interest received by
an endowment would be reported as investing rather than operating inflows.
Other changes
Other proposed changes include reducing the three net asset classifications to two (with
and without donor restrictions), and enhancing required liquidity disclosures.
Why is this important?
The proposed ASU represents a conceptually different approach to how information is
presented in financial statements. In that respect, it resembles the FASB’s research
project on Financial Performance Reporting, which is focused on developing an
operating performance metric for business entities.
What's next?
Comments on the exposure draft are due by August 20, 2015. On April 30, PwC will host
a webcast to provide not-for-profit entities and other interested stakeholders with
insights into the proposed changes. For more information regarding the webcast or to
register, click on the link above.
Questions?
PwC clients who have questions about this
In brief should contact their engagement
partner. Engagement teams who have
questions should contact the Not-for-Profit
and GASB team in the National
Professional Services Group.
Authored by:
Martha Garner
Managing Director
Phone: 973-236-7294
Email: martha.garner@us.pwc.com
Sean O’Hara
Senior Manager
Phone: 973-236-4581
Email: sean.ohara@us.pwc.com
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