Presentation of Financial Statements of Not-for-Profit Entities
Welcome back to Keiter’s series on Accounting Standard Update (ASU) 2016-14, Not-for-Profit Entities (Topic 958), Presentation of Financial Statements of Not-for-Profit Entities. This article focuses on the changes to the statement of cash flows and the changes related to investment return.
FASB ASU 2016-14: Statement of Cash Flows
Depending on the entity’s decision, implementing ASU 2016-14 may have no impact whatsoever on the presentation of the statement of cash flows. This standard allows entities to continue using either the direct or indirect method for reporting operating cash flows; however, it no longer requires the indirect reconciliation if using the direct method for reporting. Most experts agree that the direct method of reporting gives more useful information; however, a majority of all entities, for profits included, continue to use the indirect method of reporting due to familiarity. Implementing this standard provides a good opportunity to switch to the direct method of reporting since the indirect reconciliation requirement was a source of frustration and seen as an inefficiency resulting in additional time and expense to complete the statement of cash flows. With this requirement removed, entities may want to consider moving to the more informative direct method approach.
Potential Reclassification of Cash Flow Activities
More changes in this area are anticipated, but are not part of ASU 2016-14. Those changes include potential reclassifications between types of activities (operating, investing, and financing) and to align the statement of cash flows with the statement of activities.
Changes to Presentation of Investment Return
Regarding investment return, the standard allows for the net presentation of investment expense against investment income; however, gross presentation is still allowable. This applies to both external and direct internal expenses. This could impact the investment and endowment footnotes as well as presentation of functional expenses: entities will no longer need to present investment expenses at gross cost as management and general expenses.
Not all entities will have direct internal investment expenses – that is, activities involving direct conduct or direct supervision of the strategic and tactical activities involved in generating investment return.
Examples of direct internal investment expenses:
- Salaries, benefits, travel, and other costs associated with staff responsible for development and execution of investment strategy; and
- Allocable costs associated with internal investment management and supervising, selecting, and monitoring of external investment management firms.
These direct internal investment expenses DO NOT include items that are not associated with generating investment return, such as costs associated with unitization and other such aspects of endowment management.
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