In August 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2016-14 (ASU 2016-14) to make improvements to the communication of information on not-for-profit financial statements. ASU 2016-14 is effective for not-for-profit organizations with annual reporting periods beginning after December 15, 2017 (calendar year 2018 or fiscal year 2019). ASU 2016-14 focuses on the five main areas listed below, but this blog will provide information and implementation examples solely related to the presentation of operating cash flows.
Five main areas of focus in ASU 2016-14:
- Net asset classes
- Investment return
- Functional expense reporting
- Liquidity and availability of resources
- Presentation of operating cash flows
Nonprofits currently have the option to prepare their statement of cash flows utilizing either the direct method or indirect method. The two methods differ in the presentation of operating cash flows; however, each method produces the same amount of net cash derived from operating activities. Below is an example of both the direct method and the indirect method as currently required.
| DIRECT METHOD | ||||
| CASH FLOWS FROM OPERATING ACTIVITIES | RECONCILIATION OF CHANGE IN NET ASSETS TO NET CASH FROM OPERATING ACTIVITIES | |||
| Cash Received from Operations | $2,456,623 | Change in Net Assets | $(97,821) | |
| Cash Paid to Suppliers and Employees | (2,351,660) | Adjustments to Reconcile Change in Net Assets to Net Cash from operating Activities | ||
| NET CASH FROM OPERATING ACTIVITIES | 104,963 | Depreciation | 269,584 | |
| CASH FLOWS FROM INVESTING ACTIVITIES | Net Realized and Unrealized Gains on Investments | (22,060) | ||
| Net Withdrawals from Investments | 1,065,496 | Contributions Restricted for Capital | (60,582) | |
| Purchase of Fixed Assets | (242,688) | Changes in Assets and Liabilities | ||
| NET CASH FROM INVESTING ACTIVITIES | 822,808 | Contributions and Grants Receivable | (125,862) | |
| CASH FLOWS FROM FINANCING ACTIVITIES | Prepaid Expenses | 26,615 | ||
| Repayments of Notes Payable | (50,000) | Accounts Payable and Accrued Expenses | 59,108 | |
| NET CHANGE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH | 877,771 | Deferred Revenue | 55,981 | |
| CASH, CASH EQUIVALENTS, AND RESTRICTED CASH – Beginning of Year | 402,114 | NET CASH FROM OPERATING ACTIVITIES | $104,963 | |
| CASH, CASH EQUIVALENTS, AND RESTRICTED CASH – End of Year | $1,279,885 |
| INDIRECT METHOD | |
| Change in Net Assets | $ (97,821) |
| Adjustments to Reconcile Change in Net Assets to Net Cash from operating Activities | |
| Depreciation | 269,584 |
| Net Realized and Unrealized Gains on Investments | (22,060) |
| Contributions Restricted for Capital | (60,582) |
| Changes in Assets and Liabilities | |
| Contributions and Grants Receivable | (125,862) |
| Prepaid Expenses | 26,615 |
| Accounts Payable and Accrued Expenses | 59,108 |
| Deferred Revenue | 55,981 |
| NET CASH FROM OPERATING ACTIVITIES | 104,963 |
| CASH FLOWS FROM INVESTING ACTIVITIES | |
| Net Withdrawals from Investments | 1,065,496 |
| Purchase of Fixed Assets | (242,688) |
| NET CASH FROM INVESTING ACTIVITIES | 822,808 |
| CASH FLOWS FROM FINANCING ACTIVITIES | |
| Repayments of Notes Payable | (50,000) |
| NET CHANGE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH | 877,771 |
| CASH, CASH EQUIVALENTS, AND RESTRICTED CASH – Beginning of Year | 402,114 |
| CASH, CASH EQUIVALENTS, AND RESTRICTED CASH – End of Year | $1,279,885 |
ASU 2016-14 continues to extend the option of preparing the statement of cash flows utilizing either the direct method or indirect method; however, it eliminates the requirement to present a reconciliation of change in net assets to net cash from operating activities if utilizing the direct method.
CHART
| DIRECT METHOD | ||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||
| Cash Received from Operations | $2,456,623 | |||
| Cash Paid to Suppliers and Employees | (2,351,660) | |||
| NET CASH FROM OPERATING ACTIVITIES | 104,963 | |||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||
| Net Withdrawals from Investments | 1,065,496 | |||
| Purchase of Fixed Assets | (242,688) | |||
| NET CASH FROM INVESTING ACTIVITIES | 822,808 | |||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||
| Repayments of Notes Payable | (50,000) | |||
| NET CHANGE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH | 877,771 | |||
| CASH, CASH EQUIVALENTS, AND RESTRICTED CASH – Beginning of Year | 402,114 | |||
| CASH, CASH EQUIVALENTS, AND RESTRICTED CASH – End of Year | $1,279,885 |
By eliminating the reconciliation, FASB hopes to encourage nonprofits to elect the direct method; however, a reconciliation may still be reported if a nonprofit prefers to present one.
There are certain key considerations an organization should consider when determining what cash flow method to utilize and if utilizing the direct method, if a reconciliation of the change in net assets to net cash from operating activities should be disclosed. Those key considerations are as follows:
- The indirect method can be easily prepared using information derived from existing account balances and accounting reports.
- The direct method discloses operating cash receipts and payments, which is useful information to all financial statement stakeholders as it provides a more accurate picture of an organization’s cash flow situation as opposed to the indirect method. As such, it is preferred by FASB.
- Presenting the reconciliation of change in net assets to net cash from operating activities when utilizing the direct method can be beneficial to organizations with large reconciling items such as investment gains/losses, depreciation, and/or contributions restricted for long-term purposes.
Please contact your CPA or BLS Professional with any questions at 302.225.0600 to request additional guidance regarding cash flow presentations and the implementation of ASU 2016-14.
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