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MAYER HOFFMAN MCCANN P.C. – AN INDEPENDENT CPA FIRM

A publication of the Professional Standards Group

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As part of the not-for-profit financial statement project in the fourth quarter of 2013, the Financial Accounting Standards Board (FASB) recommended changes in the reporting requirements for cash flow statements and the statement of functional expenses.

Cash Flow Statements

The FASB tentatively decided to require not-for-profits (NFPs) to use the direct method when presenting cash flows from operating activities and removed the requirement to reconcile the change in net assets to net cash flows from operating activities (the indirect method). According to the FASB, the direct method, which is already used to present cash flows from investing and financing activities, would “improve the usefulness of the Statement of Cash Flows (SoCF) by providing more meaningful information” to users of NFP financial statements.

Prior to making its decision, the FASB undertook discussions with public and independent colleges and universities that use the direct method, as well as with its own NFP Advisory Committee. FASB also surveyed its NFP Resource Group. Most agreed that the direct method cash flow reporting communicates information more effectively to governing boards and other stakeholders. Also, the FASB’s proposed changes are viewed by those polled as a step toward

February 2014

FASB Recommends Changes to Cash Flow Statements and Statements of Functional Expenses Reporting

comparability across all of higher education since public colleges and universities are already required to prepare the SoCF using the direct method.

Additionally, the FASB made the following changes to better align the cash flow categories with the tentative decision for an intermediate measure of operations. Those changes included the following:

• Show interest and dividends received as investing cash flows, rather than operating cash flows as they do currently.

• Cash payments of interest would be classified as outflows from financing activities rather than as outflows from operating activities.

• Cash gifts with donor imposed restrictions that they be used to purchase, construct or otherwise acquire long lived assets for operating purposes would be classified as operating activities rather than financing activities. The associated cash payments to purchase, construct or otherwise would also be classified as operating activities rather than financing activities.

Statement of Functional Expenses

The FASB tentatively decided to change the requirements for reporting expenses for all NFPs. If the requirements are upheld:

• NFPs must present expenses by both function and nature within their financial statements. Currently, NFPs are only required to report by function.

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The information in this MHM Messenger is a brief summary and may not include all the details relevant to your situation. Please contact your MHM auditor to further discuss the impact on your audit or audit report.

A FASB review of approximately 200 FY2011 financial statements of independent colleges and universities revealed that 85 percent presented their expenses by function on the face of the statement of activities (SoA).

• NFPs would provide an analysis of all expenses by function and by nature in one of the following locations: on the face of the statement of activities, in a separate statement of functional expenses or in a schedule in the notes.

Regardless of reporting location, the analysis must include all expenses (operating and nonoperating), and according to the FASB “neither require nor preclude functionalization of nonoperating expenses.” The FASB expects most NFPs will provide this analysis as a matrix, though that format is not specifically required.

Note that voluntary health and welfare organizations currently required to present expenses by function and nature in matrix form in the statement of functional expenses will now have greater flexibility in presentation. The FASB has tentatively granted them the ability to communicate expense information in the same way as other NFPs.

Widespread response to the FASB’s proposed changes concerning both cash flow statements and statements of functional expenses reporting will surely come when an exposure draft is issued for comment, anticipated in the first quarter of 2014.

For more information

MHM’s Professional Standards Group will continue to monitor this issue and we are prepared to help our not-for-profit clients with any implementation issues that may arise.

If you have any specific questions, comments or concerns, please contact Michelle Spriggs of MHM’s Professional Standards Group or your MHM service professional. You can reach Michelle at mspriggs@cbiztofias.com or 774.206.8336.