FASB to Revise Nonprofits' Presentation of Cash Flows

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By Denise Lugo

Dec. 14 — The Financial Accounting Standards Board voted 4-3 to revise its proposed view on the presentation method not-for-profit entities should use for operating cash flows.

FASB Dec. 11 decided nonprofits should be allowed the flexibility to chose either the direct method or indirect method to present cash flows from operations.

The board, however, decided to change current requirements that they provide an indirect reconciliation if they chose to use the direct method in the statement of cash flows. That reconciliation won't be required, the board said.

The split vote came because board members felt the direct cash flow method is by far the more understandable method. Responses from some of the board's stakeholders, including universities, however, indicated many weren't in favor of the board mandating its usage, board discussions indicated.

Direct or Indirect Method Debate

“I truly believe that the direct method is much more understandable and more intuitive when you look at it and analyze it,” said FASB member Lawrence Smith. “That being said, there were a number of concerns raised that caused me to step back and pause to think about it,” he said.

A major concern, said Smith, is “a lot of board members of not-for-profit organizations come from a for-profit community, and they're used to seeing an indirect method,” and therefore a move to the direct method might be confusing to some of them.


The revised decision relates to a portion of the proposed accounting standards update issued by FASB in April titled, Not-for-Profit Entities (Topic 958) and Health Care Entities (Topic 954): Presentation of Financial Statements of Not-for-Profit Entities.

FASB proposed that all not-for-profit entities be required to use the direct method of presenting cash flows from operations. Under the main tenants of this view, the indirect method would have been permitted, but not required.

Mixed Support

Support for the board's proposed viewpoint was mixed, though there was general acknowledgement that the direct method is more understandable than the indirect method, a FASB staff accountant said during the meeting.

While many respondents support requiring it, including preparers and auditors who had experience with the direct method, some stakeholders xpressed concerns about the perceived cost of going to the direct method, or about the overall usefulness of the cash flow statement under either method, staff said.

Furthermore, some respondents said they would prefer that the board wait until if—or when—it made the same change for business entities.

Related to reconciliation issues, support was also mixed about whether to retain the requirement to provide the indirect method's reconciliation of cash flows from operations to the total change in net assets, staff also said.

Many respondents said they believe no necessary information would be lost if the indirect method was no longer required. However, they still prefer to retain the reconciliation of operating cash flow to total change in net assets, staff said.

Aspects of Proposal Affirmed

Regarding other aspects of the proposal, FASB affirmed its viewpoint that:

• temporarily restricted net assets and permanently restricted net assets should be combined into one donor-restricted net asset class;

• the total amount by which endowment funds are underwater—valued less—should be presented within net assets with donor restrictions;

• nonprofits should use an approach that considers when an asset is placed-in-service for reporting expirations of restrictions to acquire or construct long-lived assets. The option to release the donor-imposed restriction over the estimated useful life of the acquired life would be eliminated in such instances.


To contact the reporter on this story: Denise Lugo in Norwalk, Conn., at dlugo@bna.com

To contact the editor responsible for this story: Laura Tieger Salisbury at lsalisbury@bna.com

For a copy of the board's handout on this topic go to page nine of the following link http://src.bna.com/bwz.

For a discussion on preparing cash flow statements, see 5121-3rd, The Cash Flow Statement.