On August 18, 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-14 “Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities.” ASU 2016-14 requires a number of changes to the financial statements of NFPs. These changes will be effective for fiscal years beginning on or after December 15, 2017.
This article is the eighth in a series discussing the changes required by ASU 2016-14. In this article, we discuss changes to the statement of cash flows.
U.S. GAAP requires that not-for-profit organizations (NFPs) include a statement of cash flows as a part of the basic financial statements. The statement presents the organization’s cash flows, grouped into three categories: operating, investing, and financing.
Historically, NFPs have had two options when reporting operating cash flows: the indirect method, or the direct method. The indirect method starts with total change in net assets, which is adjusted to reach a net total of cash flow from operating activities.
The direct method reports the amounts of cash receipts and payments (for example, cash received from donors, grantors, and customers; and cash paid to vendors and employees) to reach the same net total of cash flow from operating activities.
NFPs that choose to report operating cash flows using the direct method must also report an indirect reconciliation of total change in net assets, to net total cash flow from operating activities. The result is that NFPs that use the direct method must also report the same information as the indirect method.
What is Changing?
ASU 2016-14 will eliminate the requirement that NFPs present the indirect reconciliation if they choose to use the direct method for reporting operating cash flows. For NFPs that use the direct method, this eliminates the requirement of presenting operating cash flows in two different ways.
It is important to note that this changes what is required to be presented. A NFP may still decide to include the indirect reconciliation as an optional disclosure.
It is also important to note that this change only applies to NFPs. Under U.S. GAAP, reporting entities that are not NFPs (for example, public companies and private companies), will still be required to present the indirect reconciliation if they choose to use the direct method in their statements of cash flows.
Want to Learn More?
This article focuses on one of the key changes required by ASU 2016-14. In future articles, we will discuss other key changes in more detail, along with practical guidance on implementation issues. In the meantime, please contact your Clark Nuber service team, or Andrew Prather, if you would like to discuss how these changes could affect your NFP’s financial statements.
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