In August 2016, a new standard was issued that made targeted improvements to the financial reporting model used by not-for-profits. This historic update was released by the Financial Accounting Standards Board (FASB) as Accounting Standards Update (ASU) 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities.
This article is part of a series that provides an in-depth overview of the changes to not-for-profit financial reporting required as a result of the new standard. The first article gave a snapshot of the coming reporting changes, while the second article highlighted net asset reporting requirements. The third article focused on expense reporting, the fourth article discussed the presentation of investment return and expenses, and the fifth article addressed liquidity risk. In this article, we describe changes to the statement of cash flows.
The Current Standard
Under current guidance, if a not-for-profit uses the direct method of presenting operating cash flows, it’s also required to present the indirect method, which is also known as the reconciliation method and requires additional work.
The direct method requires not-for-profits to include cash flows from operating activities in specific line items, such as:
- Cash received from contributors
- Cash paid to suppliers
In contrast, organizations that use the indirect method show the change in net assets for the period followed by adjustments needed to convert the change in net assets to the net cash used for operating activities.
What the Standard Changes
Not-for-profits can continue to use either the direct or indirect method of reporting operating cash flows, but they’re no longer required to disclose the reconciliation if employing the direct method.
Under the new standard, organizations retain the flexibility and freedom to choose the reporting method that best serves the needs of their financial statement users—creditors, donors, grantors, and other stakeholders. It also allows them to strike the right balance of improving the relevance and understandability of financial information without imposing undue cost.
Although no longer mandated, not-for-profits might want to weigh the costs and benefits of continuing to provide operating cash flow information under both methods. While the new standard doesn’t require the indirect reconciliation, it doesn’t prohibit its inclusion, and some users find the indirect method more useful, as it reconciles results in the statement of activities to cash from operating activities.
When to Implement the Standard
Early adoption is permitted before the standard’s effective date of fiscal years beginning after December 15, 2017. It’s also effective for interim periods within fiscal years beginning after December 15, 2018.
We're Here to Help
We’ll continue to provide insight and implementation suggestions through a series of articles on this new standard. To learn more or to gain a better understanding of how the specific changes coming to not-for-profit financial statements might affect your organization, contact your Moss Adams not-for-profit professional.