With the public comment deadline fast approaching, accounting experts are urging public companies to take a close look at a proposal the Financial Accounting Standards Board has issued related to not-for-profit entities because it could signal what FASB has in mind for public companies as well.
FASB has issued three sets of frequently asked questions about its proposal to alter the presentation of financial statements for not-for-profit entities. The proposal would “dramatically change” several important areas of reporting for not-for-profit entities, especially around operating activities, says Beth Paul, a partner with PwC, in an alert to clients. “Given the FASB has similar projects on the agenda for business entities, those entities may also want to consider weighing in before the deadline,” she warns.
According to FASB’s summary of the proposal, the objective is to improve the current net asset classification requirements along with information presented in financial statements and footnotes to help users of financial statements better assess and understand an entity’s liquidity, financial performance, and cash flows. Paul points out public companies should take a close look at the proposed requirement to address inconsistencies in the reporting of intermediate measures of operations in the statement of activities, including inconsistencies between that reporting and the reporting of operating cash flows.
FASB’s proposed rule would require not-for-profit entities to present specific subtotals on the statement of activities, Paul points out. “This is a novel concept,” she writes. Except for not-for-profits in the healthcare sector, not-for-profits currently have some flexibility in how they report operating results, if they even elect to report an operating measure, she says.
“The heart of this new approach is a new definition of operating activity,” she says. The proposed standard would define operating activity based on an entity’s mission and availability, which differs from the current focus on ongoing, major, or central activities. The proposal would require not-for-profits to use the direct method of cash flow reporting, she points out.
FASB Vice Chairman Jim Kroeker earlier warned public companies to study the proposal because it provides a preview of what the board would like to change in business reporting as well. “I’d challenge you to look at the changes we’re making for not-for-profits that would eliminate the use of the indirect method of cash flows,” he said at a regional accounting conference. “There’s the idea that perhaps we would extend that to business enterprises as well.”
FASB will continue to accept comments on the proposal through Aug. 20.