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.

1. MHMMessenger
February 2014
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M AY E R H O F F M A N M C C A N N P. C . – A N I N D E P E N D E N T C PA F I R M
A publication of the Professional Standards Group
FASB Recommends Changes to Cash Flow Statements and Statements of
Functional Expenses Reporting
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
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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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2. MHMMessenger
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.
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.
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.
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.
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