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Issues In-Depth
FASB’s Proposed Changes to
Not-for-Profit Financial Statements
May 2015
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Issues In-Depth® 2015
Contents
Background
2
Changes to Net Asset Classifications
3
Net Assets without Donor Restrictions
3
Net Assets with Donor Restrictions
3
Underwater Endowments
4
Other Options Considered
5
Disclosures
6
Intermediate Measures of Operations
9
Current Requirements and Practice
9
Mixed Views about Creating a Single Definition of Operations
9
Mission and Availability Dimensions
10
Impact on Health Care Entities’ Performance Indicator
11
Impact on Debt Covenants
12
Investing and Financing Activities
12
Capital Transactions and Events
14
Board Designations, Appropriations, and Similar Transfers
15
Accounting Write-offs
16
Retirement Benefits
17
Equity Transfers and Transactions
17
Presentation in Statement of Activities
18
Changes to the Statement of Cash Flows
19
Direct Method
19
Changes to Align with the Definition of Operations in Statement of
Activities
19
Noncash Operating, Investing, and Financing Activities
20
Issues In-Depth® 2015
Reporting of Expenses by Nature and Function
21
Voluntary Health and Welfare Entities
22
Disclosures Required for Expense Allocations
23
Management and General Expenses
23
Presentation of Investment Expenses and Return
24
Investment Expenses
24
Gross Investment Return
25
Total Performance of the Other Investment Portfolio
25
Additional Liquidity Disclosures
26
Effective Date and Transition
27
Alternative Views
28
Responding to the Proposed ASU
29
Appendix 1: Illustrative Statements of Activities
30
Appendix 2: Illustrative Statement of Cash Flows
35
Issues In-Depth® — January 2015
FASB’s Proposed Changes to
Not-for-Profit Financial Statements
The FASB has invited constituents to comment on a proposed
Accounting Standards Update (ASU) that would change the
presentation of financial statements of not-for-profit entities (NFPs),
including health care (HC) entities.1
Key Facts
The proposed ASU would:
 Reduce the number of net asset classes presented in the financial statements from three to
two: with donor-imposed restrictions and without donor-imposed restrictions;
 Define two intermediate measures of operations and require their presentation in the
statement of activities;
 Eliminate the performance indicator currently required for NFP business-oriented health care
entities; and
 Require presentation of operating cash flows using the direct method and recategorize items
reported in the statement of cash flows to align with the proposed definition of operations in
the statement of activities.
Comments are due August 20, 2015.
Key Impacts
 Eliminating the distinction between temporary and permanent restrictions from the financial
statements would reduce reporting complexity and enhance understandability. These
proposed changes reflect changes in state laws, including de-emphasizing the historic dollar
value (original gift) for donor-restricted endowments in most jurisdictions.
 Comparability across not-for-profits may be enhanced by defining operating activities, but
complexity may increase. The proposed definition may be inconsistent with how some NFPs
currently view their operations or present their financial statements.
 Comparability between for-profit and not-for-profit health care entities will be reduced because
of the removal of the currently required performance indicator.
 Requiring operating cash flows to be presented using the direct method may enhance
understandability and usefulness of information. However, recategorization of cash flows may
introduce complexity for users familiar with prior definitions, which also would continue to be
used by business entities.
1
FASB Proposed Accounting Standards Update, Presentation of Financial Statements of Not-for-Profit Entities, available
at www.fasb.org.
Issues In-Depth / May 2015
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1
Issues In-Depth® — January 2015
Background
The FASB added a project to its agenda in 2011 to improve NFPs’ financial reporting. The
project’s objectives address suggestions from the FASB’s Not-for-Profit Advisory Committee
(NAC) and are focused on improving:
 Net asset classification requirements; and
 Information provided in financial statements and accompanying notes about liquidity, financial
performance, and cash flows.
The proposed ASU would amend current financial reporting guidance to implement the findings
of the FASB’s NFP project.2 This reporting guidance is primarily based on Statement 117, which
was issued in 1993 and has remained unchanged, other than a few technical amendments to
provide interpretative guidance.3 Based on discussions with the NAC and other constituents, the
FASB said that the existing standards for financial reporting by NFPs are generally sound.
However, the FASB also acknowledged that it was time to take a fresh look at the reporting
standards to make improvements that will meet the needs of donors, grantors, creditors,
governing boards, and other users of NFP financial statements.
The proposed changes do not address requirements for recognition and measurement of assets
and liabilities or revenues, expenses, gains, and losses. Instead, they focus on how these items
are presented and disclosed.
During the project, the FASB performed outreach activities with stakeholders in addition to the
NAC. These stakeholders included members of the National Association of College and
University Business Officers’ (NACUBO) Accounting Principles Committee; the Healthcare
Financial Management Association’s Principles and Practices Board; the American Institute of
Certified Public Accountants’ (AICPA) Expert Panels for NFPs and for HC entities; and state CPA
societies. Additional outreach is planned during the comment period. The FASB also plans to
hold two public roundtables in September and October, to obtain views about the proposed
changes.
In addition to the standard-setting project, a research project, NFP Financial Reporting: Other
Financial Communications, was added to the FASB’s agenda in 2011 to study other
communication methods, such as management’s discussion and analysis, that NFPs could use
to tell their financial story. The FASB’s research found that these communication methods were
most prevalent in the higher education and health care industries and among larger NFPs.
However, it was noted that these communications varied greatly. Many FASB members
expressed concern that providing guidance for communications outside the basic financial
statements was beyond the scope of the FASB’s traditional activities. The FASB also discussed
the availability of resources and how to prioritize efforts on more immediate standard-setting
needs. The FASB ultimately removed this research project from its agenda in 2014.
2
Current financial reporting guidance for NFPs is located in FASB ASC Topic Nos. 958, Not-for-Profit Entities, and 954,
Health Care Entities, both available at www.fasb.org.
3
Issues In-Depth / May 2015
FASB Statement No. 117, Financial Statements of Not-for-Profit Organizations, available at www.fasb.org.
©2001–2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG
International Cooperative, a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative, a Swiss entity.
2
Issues In-Depth® — January 2015
KPMG Observations
The proposed ASU is intended to improve the presentation of NFPs’ financial statements.
However, certain proposed changes would result in additional differences between NFPs
and business entities. These differences could impact comparability of financial
statements in some business segments that include both NFPs and business enterprises,
such as health care. Also see the discussion of the Alternative Views section in this
document.
Changes to Net Asset Classifications
The net asset classes in the financial statements would be reduced from three to two under the
proposed ASU. However, NFPs would still be required to disclose information about the nature
and amounts of donor-imposed restrictions. NFPs also would be required to disclose information
about the amounts and purposes of board-designated net assets without donor restrictions.
Current
Proposed

Unrestricted

Net Assets without Donor Restrictions


Temporarily Restricted

Net Assets with Donor Restrictions
Permanently Restricted
Net Assets without Donor Restrictions
The current net asset terminology was established by Statement 117 in 1993. When reexamining this terminology, the FASB decided to change unrestricted net assets to net assets
without donor restrictions. Unrestricted net assets is defined as the part of net assets that is
neither permanently restricted nor temporarily restricted by donor-imposed stipulations.
However, some users have interpreted this term more broadly to refer to the absence of other
restrictions beyond those imposed by a donor (i.e., legal, contractual, or other). This
misunderstanding potentially leads to incorrect conclusions when assessing an NFP’s liquidity or
financial flexibility. The FASB proposed the change to make the terminology more precise to
avoid the misunderstanding that some users have experienced.
Net Assets with Donor Restrictions
The FASB decided to combine the two remaining net asset classes, temporarily restricted and
permanently restricted, to create a combined net assets with donor restrictions class.
KPMG Observations
The distinction between temporary and permanent became blurred when the model Uniform
Prudent Management of Institutional Funds Act (UPMIFA) was approved by the Uniform
Law Commission in 2006 and subsequently enacted by most states. UPMIFA governs the
investment and management of endowment funds by NFPs. UPMIFA de-emphasized the
concept of historic dollar value (original gift amount). This law changed the focus from the
Issues In-Depth / May 2015
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3
Issues In-Depth® — January 2015
prudent spending of net appreciation of the fund to prudent spending from the entire donorrestricted endowment fund (i.e., the original gift amount plus accumulated earnings).
UPMIFA permits NFPs to spend from a donor-restricted endowment fund even in
circumstances where the fair value of the endowment has fallen below the original amount
of the gift. This change in focus essentially allows spending from the portion of net assets
classified as permanent.
There was intense debate in the not-for-profit community about whether the adoption of
UPMIFA should affect the net asset classification of donor-restricted endowment funds.
Some constituents at the time proposed restructuring the net asset classification model so
the entire endowment fund would be classified in one net asset class. However, this view
was rejected when the FASB ultimately issued guidance in 2008. 4 The net asset
classification model and the portion of the donor-restricted endowment fund classified as
permanently restricted by NFPs remained largely unchanged (i.e., generally the historic dollar
value). The FASB’s proposed changes to combine the two restricted net asset classes are
more in line with the changes in the law under UPMIFA.
Underwater Endowments
If the fair value of an individual donor-restricted endowment fund is less than the original gift
amount required to be maintained by the donor or by law, that deficiency would be reported in
the net assets with donor restrictions class. Currently, these amounts are reported in the
unrestricted net assets class.
KPMG Observations
In 2008, the FASB retained its guidance that classified donor-restricted underwater
amounts within unrestricted net assets. However, continuing to include these underwater
amounts in the unrestricted net assets class created misconceptions. This categorization
implied that these deficiencies would need to be funded or repaid from unrestricted
sources, which conflicted with UPMIFA’s basic tenets. The FASB’s current proposal to
classify these amounts in the net assets with donor restrictions class better reflects
UPMIFA’s basic tenets. UPMIFA incorporates the view that institutions invest their
endowments using a total-return approach, which may result in fluctuations in the fund’s
value. UPMIFA allows institutions to determine spending based on the total assets of the
fund. However, while UPMIFA de-emphasized the distinction of principal versus income,
institutions still must track principal under UPMIFA. In fact, as the drafters of UPMIFA
have stated:
Although the Act does not require that a specific amount be set aside as “principal,”
the Act assumes that the institution will act to preserve “principal”…while spending
“income” (i.e., making a distribution each year that represents a reasonable
spending rate, given investment performance and general economic conditions).
Thus an institution should monitor principal in an accounting sense, identifying the
original value of the fund (the historic dollar value) and the increases in value
necessary to maintain the purchasing power of the fund. 5
4
FASB Staff Position No. FAS 117-1, Endowments of Not-for-Profit Organizations: Net Asset Classification of Funds
Subject to an Enacted Version of the Uniform Prudent Management of Institutional Funds Act, and Enhanced Disclosures
for All Endowment Funds (subsequently codified into Topic 958), available at www.fasb.org.
5
National Conference of Commissioners on Uniform State Laws, Uniform Prudent Management of Institutional Funds
Act (2006), www.uniformlaws.org/shared/docs/prudent%20mgt%20of%20institutional%20funds/upmifa_final_06.pdf
Issues In-Depth / May 2015
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Issues In-Depth® — January 2015
Example 1: Presentation of Donor-Restricted Endowment Funds
Under current guidance, Gift A, a $105 million donor-restricted endowment received on
January 1, 2015, which has fallen in value to $100 million at March 31, 2015, is presented
as $105 million in permanently restricted net assets and negative $5 million in
unrestricted net assets at March 31, 2015.
Gift B, comprised of a historic dollar value (original gift) of $75 million and accumulated
gains of $25 million, is presented as $75 million in permanently restricted net assets and
$25 million in temporarily restricted net assets at March 31, 2015.
Under the FASB’s proposed ASU, the $100 million balance of each endowment would be
reported in the net assets with donor restrictions category.
KPMG Observations
Colleges and universities participating in student financial assistance programs of the U.S.
Department of Education (Education Department) must comply with certain general
standards of financial responsibility. These standards were published in 1997 and include
a composite score based on the institution’s primary reserve, equity, and net income
ratios.
A Senate task force recently indicated that the Education Department has not kept up
with changes in accounting practices in applying the ratios. 6 The Senate task force
referred to an earlier study by the National Association of Independent Colleges and
Universities (NAICU).7 The Senate task force noted that the study concluded that the
Education Department’s regulators “were not using generally accepted accounting
standards...in calculating the financial ratios.” For example, the report found that the
Education Department was treating endowment losses as expenses and excluding
accumulated endowment earnings from temporarily restricted net assets when
calculating the primary reserve ratio.
The changes in the net asset classifications proposed by FASB may create additional
challenges in the application of the financial responsibility ratios. However, the changes
also could prompt the Education Department to take a fresh look at the ratios and its
application of relevant U.S. GAAP.
Other Options Considered
The FASB considered other net asset classification models, including whether net assets should
be distinguished not only based on donor restrictions but also legal, contractual, or other
restrictions. They also considered requiring NFPs to distinguish net assets by purpose (e.g.,
operations, net investment in plant, or long-term investment). However, after further research
and outreach, the FASB decided to update, but not overhaul, the net asset classification model.
6
Recalibrating Regulation of Colleges and Universities, Report of the Task Force on Federal Regulation of Higher
Education, available at www.help.senate.gov/imo/media/Regulations_Task_Force_Report_2015_FINAL.pdf.
7
Report of the NAICU Financial Responsibility Task Force, November, 2012, available at
www.naicu.edu/docLib/20121119_NAICUFinan.Resp.FinalReport.pdf.
Issues In-Depth / May 2015
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Issues In-Depth® — January 2015
KPMG Observations
Some NFPs currently delineate categories (such as net investment in plant) within the
unrestricted net assets class either on the face of the financial statements or in the
disclosures. This disaggregation within the net assets without donor restrictions class
would not be prohibited by the proposed ASU.
Disclosures
Donor-Imposed Restrictions
NFPs would still be required to disclose information about the nature and amounts of different
types of donor-imposed restrictions. This disclosure would focus on both how and when, if ever,
the resources could be used rather than applying a bright-line distinction between temporary and
permanent restrictions. The following example shows how an NFP may disclose this information.
Example 2: Net Assets with Donor Restrictions Disclosure
Issues In-Depth / May 2015
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Issues In-Depth® — January 2015
KPMG Observations
Increased Importance of Disclosures. Given the streamlining on the face of the financial
statements, the net asset disclosures would become more important to provide donors,
creditors, and other users with relevant information about NFPs’ financial flexibility. The
level of disaggregation of the nature of restrictions would be left to NFPs’ discretion.
There would be no requirement to continue to differentiate between permanently and
temporarily restricted net assets. However, NFPs may opt to provide information to allow
financial statement users to make a similar distinction.
To illustrate, Example 2 discloses the total accumulated earnings included in the donorrestricted endowments. While not required, some NFPs may consider disclosing these
amounts (or the inverse, historic dollar value) either in a similar aggregated manner or in
further disaggregated components (e.g., by purpose). The FASB decided not to prescribe
these disclosures to give NFPs the flexibility to decide what additional disclosures would
be useful.
NFPs also could opt to present disaggregated, descriptive line items on the balance sheet
to further delineate the nature and types of restrictions within the net assets with donor
restrictions balance.
Impact on Statement of Activities. Streamlining the net asset classes would help
reduce reporting complexity. However, the combination of the two restricted columns in
the statement of activities also would eliminate some information about the differing
types of donor-restricted contributions received during the period. (See Appendix 1 for
illustrative statements of activities). There would be no requirement to distinguish
between the different types of restrictions (e.g., a gift for the following period’s
operations versus a gift for a permanent endowment) either on the face of the statement
of activities or in the accompanying notes. This gap would be partially offset by the
disclosures presented about the type of restrictions in the net asset balances at the end
of the period. NFPs may also provide additional information about the types of restrictions
imposed on the contributions received during the period, either on the face of the
statement of activities or in the accompanying notes.
Board Designations
NFPs would be required to disclose information about the amounts and purposes of boarddesignated net assets without donor restrictions. Current FASB guidance includes specific
disclosure requirements relating to board-designated endowment funds (including a
reconciliation of the beginning and ending balances). Some NFPs also disclose information about
other types of board-designated net assets. However, this is not currently required. Under the
proposed ASU, disclosures of the amounts and purposes would be required for all boarddesignated net assets without donor restrictions, including those for a specific future
expenditure. The following example shows how this information may be disclosed.
Issues In-Depth / May 2015
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Issues In-Depth® — January 2015
Example 3: Board-designated Net Assets Disclosure
KPMG Observations
While not required, NFPs may also opt to show board-designated net assets as a
component of net assets without donor restrictions on the balance sheet, either in the
aggregate or in its disaggregated components.
Underwater Endowments
The required endowment disclosures would be expanded under the proposed ASU to include
the:
 NFP governing board’s policy on spending from underwater endowment funds (and whether
this policy was followed);
 Original gift amount (or level required by donor stipulations or law) of underwater endowment
funds in the aggregate; and
 Fair value of underwater endowment funds in the aggregate.
Some constituents have questioned whether such disclosures remain useful in light of the deemphasis of the original gift amount and the focus on total return in UPMIFA. However, the
FASB believes that these disclosures (in addition to the current requirement to disclose the
aggregate underwater amount) would assist users in analyzing NFPs’ liquidity and financial
flexibility, particularly during a downturn in the financial markets.
Issues In-Depth / May 2015
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Issues In-Depth® — January 2015
Intermediate Measures of Operations
The proposed ASU defines two intermediate measures of operations and requires their
presentation in the statement of activities by all NFPs, including HC entities.
Current Requirements and Practice
NFP business-oriented HC entities are currently required to present in the statement of activities
a performance measure known as the performance indicator, as defined in current accounting
guidance for health care entities. The performance indicator is designed to be the equivalent of
net income from continuing operations. These entities also have the option to present other
intermediate measures.
Other NFPs are not currently required to present an intermediate measure in the statement of
activities but have the option to define and present this measure. If NFPs present an
intermediate measure of operations, they currently are required to ensure that their definition of
operations is apparent from the face of the statement of activities or disclosed in the notes.
Given the lack of a defined intermediate measure, there is currently great diversity in the
presentation of such a measure by NFPs. However, in some NFP industry segments, some
organizations have opted to use a consistent definition of operations. NACUBO’s Accounting
Principles Council issued a position paper in 2007 that discussed its views on defining an
operating measure for private colleges and universities.8 However, while the position paper
recommended certain transactions and events that would be classified as nonoperating, it also
acknowledged that total consensus was not anticipated due to different internal board policies or
interpretations of operations. Indeed, while many colleges and universities follow the
recommendations in NACUBO’s paper, adherence to every aspect of the recommended model
is not universal.
Mixed Views about Creating a Single Definition of Operations
During the FASB’s outreach, there was a mixed reaction to the decision to create a consistent
definition of operations for all NFPs. While this would enhance comparability across NFPs, it also
was recognized that it would be challenging given their diversity. Some constituents supported
developing multiple definitions of operations based on the type of NFP. Many constituents
supported the current flexibility and believed that this should be maintained. These constituents
believed that this flexibility was necessary and its benefits outweighed the enhanced
comparability, which was the goal of a single definition of operations.
Some also questioned the necessity of defining one consistent measure of operations for NFPs
when consideration of this requirement for business entities is in its very early stages. A FASB
research project currently is evaluating ways to improve the relevance of information presented
in the performance statement of business entities and to determine whether a consistent
operating performance metric should be developed. Some supported delaying the requirement
to have a consistent measure of operations for NFPs until the research project for business
entities was further along, which would allow for a unified decision for both NFPs and business
entities. However, this delay was supported by only a minority of FASB members. See the
Alternative Views section.
The FASB concluded that financial reporting for NFPs could be improved and made more
comparable if a principled approach could be developed to define operations for all NFPs,
including HC entities. Using a single definition also would remove the current requirement for
NFPs to disclose the organization’s definition of operations, if an intermediate measure of
operations is reported.
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Issues In-Depth / May 2015
Defining an Operating Measure for Independent Colleges and Universities, available at www.nacubo.org.
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Issues In-Depth® — January 2015
Various alternatives were considered, including distinguishing between activities that are
recurring and non-recurring; large, unusual, or both; or beyond management’s control. However,
there were challenges to each of these approaches. The FASB ultimately decided to define
operations on the basis of two dimensions: mission and availability. Classification of an item as
revenue, expense, gain, or loss would not determine whether it is considered inside or outside of
the defined intermediate measures of operations. The two dimensions of mission and availability
would be the only determining factors.
Mission and Availability Dimensions
Under the proposed ASU, the statement of activities would be separated into operating and
nonoperating on the basis of two dimensions.
Mission Dimension
Availability Dimension


Resources that are from, or directed
at, carrying out the NFP’s purpose for
existence
Resources that are available for
current period activities, considering
both external limitations and internal
actions of the NFP’s governing board
Most constituents are generally supportive of the availability notion that results in the
intermediate measures of operations being a subset of the change in net assets without donor
restrictions. This is consistent with current reporting of many organizations. Many constituents
conceptually favor the mission dimension. However, the proposed application of the mission
dimension has resulted in significant debate, as discussed below.
The proposed ASU would require all NFPs (including business-oriented HC entities) to present
two measures (subtotals) associated with the change in net assets without donor restrictions in
the statement of activities:
Operating Excess (Deficit) Before
Transfers
Operating Excess (Deficit) After
Transfers


Activities included in the operating
excess (deficit) before transfers, and

Effects of internal actions resulting
from governing board designations,
appropriations, and similar transfers
that make resources unavailable (or
available) for carrying out an NFP’s
current-period purposes

Issues In-Depth / May 2015
Revenues, expenses, gains, and
losses that are from or directed at
carrying out the NFP’s purpose for
existence and are available for use in
the current period, and
Donor-restricted support that became
available in the period for carrying out
the NFP’s purpose for existence
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Issues In-Depth® — January 2015
KPMG Observations
It is debatable which measure (subtotal) would be more meaningful to users of the
financial statements. The operating excess (deficit) before transfers is likely to be more
comparable across NFPs given the way it is defined. However, it is arguable whether this
subtotal would be as meaningful for some NFPs who have traditionally defined operations
differently for internal or external communications.
The operating excess (deficit) after transfers subtotal has the potential to be more
meaningful to NFPs because the proposed ASU provides flexibility related to internal
transfers. NFPs would have more control over this subtotal through transfers and would
be able to move this subtotal closer to their internal view of operations. Transfers include
those that would be required by the proposed ASU as well as those made at the
discretion of the NFP’s governing board or designees. However, this flexibility also may
provide the opportunity for NFPs to use arbitrary or discretionary items to structure
operating results to meet desired objectives. This may reduce comparability among NFPs
or in financial statements in one period versus another. Using transfers may create
additional effort for external users who may need to read the disclosures to analyze the
operating performance of NFPs with significant transfers.
Impact on Health Care Entities’ Performance Indicator
The FASB has indicated that there is no longer a compelling need for NFP business-oriented HC
entities to present the performance indicator because all NFPs would be required to provide
standardized intermediate measures of operations. NFP business-oriented HC entities would not
be precluded from presenting the performance indicator. However, the proposed ASU would
remove the performance indicator from U.S. GAAP and if it was presented, it would be
considered a non-GAAP measure.
KPMG Observations
While the proposed standard would provide comparability among NFP entities, including
those in the HC industry, it would result in significant diversity in reporting between NFP
and for-profit HC entities. Currently, there is comparability in the presentation of financial
performance between NFP business-oriented HC entities and for-profit HC entities. Many
NFP HC entities are run as business entities similar to for-profit HC entities. The current
U.S. GAAP NFP HC model was developed with this in mind. The performance indicator
was designed to be analogous to income from continuing operations of a for-profit entity,
not operating income. Having a reporting model under the proposed ASU in which NFP
business-oriented HC entities and for-profit HC entities differ would increase complexity
for HC financial statement users.
As discussed below, there are conflicts between the classification of certain transactions
(e.g., equity transfers, capital transactions, interest expense, and investment return) in the
current HC performance indicator and the proposed definition of operations. While the
FASB neither prohibits nor encourages continuing to report the performance indicator, it
has indicated that presenting a non-GAAP measure would add complexity to the financial
statements and run the risk of confusing users. Given the conflicts between the
performance indicator and the intermediate measures of operations, it would not be
practical to present the performance indicator in the statement of activities.
Issues In-Depth / May 2015
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Issues In-Depth® — January 2015
Impact on Debt Covenants
KPMG Observations
Debt agreements may include financial covenants that are based on the performance
indicator used by HC entities or, in some cases, the intermediate measure of operations
currently defined by individual NFPs. There also may be covenants based on the existing
net asset classification model. NFP entities should consider discussions with bond
counsel and debt holders to determine whether any amendments to their debt
agreements would be necessary if the proposed ASU becomes effective.
While the definition of operations is principle-based, the proposed ASU does specifically address
the reporting of certain transactions. The more significant transactions are discussed below.
Investing and Financing Activities
Investing and financing activities, other than those directed at carrying out NFPs’ programs,
would not meet the mission dimension, and would therefore be classified as nonoperating
activities. The FASB views these activities as tools for NFPs to achieve their mission rather than
resources that are from or directed at carrying out their mission.
NFP businessoriented HC entities
would no longer be
required to classify
investments as
trading versus other
than trading
securities.
Investment Return
Investment revenues, expenses, gains, and losses that result from programmatic investing
(activity of making loans or other investments that are directed at carrying out the NFP’s mission)
would be reported as operating activities. Programmatic investing would include joint venture
arrangements, partnerships, and similar strategic investments in related entities that health care
systems typically engage in to achieve their purposes. Subsidized and forgivable loans that
foundations often make to help finance charities and student and faculty loans made by
universities also would be considered programmatic investing and included in operating
activities.
Net investment return that results from non-programmatic investment activity, such as total
return investing, would be reported as nonoperating activity.
Current U.S. GAAP guidance for health care entities provides very specific guidance on which
components of investment return are included in the performance indicator for NFP businessoriented HC entities. For example, interest, dividends, and realized gains are included in the
performance indicator. Unrealized gains and losses on trading securities are included in the
performance indicator. Other unrealized gains and losses are excluded. Under the proposed
definition of operations, there is no such distinction and all non-programmatic investment return
would be nonoperating.
The proposed ASU specifies that investment return appropriated for spending on current-period
operations (including through a spending rate policy on investment return earned by endowment
funds) would be presented as an internal transfer. However, under the proposed ASU, the
operating excess (deficit), both before and after transfers, would include all donor-restricted
support that becomes available (i.e., is released) in the period for carrying out the NFP’s purpose.
The proposed ASU includes illustrations that demonstrate that net assets released from
restrictions, which originate from investment return appropriated from a donor-restricted
endowment fund, is included in operating revenues, gains, and other support and the resulting
operating excess (deficit) before transfers. Investment return appropriated from a quasiendowment would be shown in the transfers section and therefore excluded from the operating
excess (deficit) before transfers subtotal.
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12
Issues In-Depth® — January 2015
KPMG Observations
NFP businessoriented HC
entities would no
longer be
permitted to use
cash flow hedge
accounting for
derivatives (e.g.,
interest rate
swaps) as these
entities would no
longer report a
measure
equivalent to other
comprehensive
income.
Many NFPs currently budget a portion of investment return to fund operations. The
investment return may be earned on investments included in either a donor-restricted
endowment fund, a board-designated endowment fund, or a general portfolio held to
support operations. The difference in presentation between appropriations from donorrestricted endowment funds and appropriations from other investment portfolios would
result in some investment return (appropriated from donor-restricted endowments)
included in operating revenues, gains, and other support and in the operating excess
(deficit) before transfers. Other investment return would be excluded from operating
revenues, gains, and other support and only included in the operating excess (deficit) after
transfers (as illustrated in Example 4).
Example 4: Investment Return
NFP A has a donor-restricted endowment fund valued at $500 million that has no purpose
restrictions on the investment return. Under UPMIFA, NFP A appropriates investment
return to be used for operations using a 4 percent spending rate. In 20X1, $20 million is
released from restrictions and included in operating revenues, gains, and other support.
This amount is also included in both operating subtotals, operating excess (deficit) before
transfers and operating excess (deficit) after transfers.
NFP B has a board-designated fund that was created from donor contributions received
with no donor restrictions. The NFP’s governing board decided to designate the funds to
be held in the NFP’s board-designated endowment with the return used to support
operations. NFP B also has a 4 percent spending rate and appropriates $20 million to be
used for operations in 20X1. In this instance, the $20 million is excluded from operating
revenues, gains, and other support and included in the transfers section as a board
appropriation. This amount would be excluded from the first operating subtotal, operating
excess (deficit) before transfers, and included only in the second subtotal, operating
excess (deficit) after transfers.
All other activity being equal between the two entities, NFP A could potentially show an
operating excess before transfers and NFP B an operating deficit before transfers, as a
result of the difference in presentation of the investment return used for operations.
Financing Activities
Many NFPs currently view interest expense as an operating cost. For NFP business-oriented
HC entities, interest expense is currently included within the performance indicator. Under
the proposed ASU, interest expense would be excluded from operating expenses.
Example 5: Interest Expense
NFP A elects to rent its facilities while NFP B elects to borrow funds to acquire its
facilities. Under the proposed ASU, NFP A would report rent expense as an operating
expense while NFP B would report the interest on the borrowing as a nonoperating
expense. As a result, the operating excess (deficit) reported for NFP A versus NFP B
could be significantly different.
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Issues In-Depth® — January 2015
Capital Transactions and Events
The current
requirement to
generally include
impairment losses
and gains/losses
on sales of longlived assets within
operations would
be retained under
the proposed ASU.
All gifts of long-lived assets without donor restrictions would be reported as operating revenues.
These gifts would meet the mission dimension because all contributions are considered to carry
out the NFP’s mission. Because these gifts are received without donor restrictions, they would
also meet the availability dimension. However, unless the gifted long-lived asset is sold, NFPs
also would report a transfer out of operations for the entire amount of the gifted long-lived asset.
This would occur because the inherent long-term nature of the gifted asset makes it not fully
available for current operations. If the NFP decided to sell the capital asset, the gift would be
included in operating revenues with no transfer out of operations prescribed by the proposed
ASU.
Purpose-restricted gifts of long-lived assets and gifts of cash restricted for acquisition or
construction of long-lived assets generally would be reported initially as revenues that increase
net assets with donor restrictions (i.e., outside of operations). Absent specific donor stipulations
describing how long these assets must be used, NFPs would report the release from donor
restrictions when the asset is placed in service. The release would be reported as an increase in
net assets without donor restrictions within operating activities and a decrease in net assets with
donor restrictions. The proposed ASU retains the ability for NFPs to report donor-restricted
contributions whose restrictions are met in the same period as support within net assets without
donor restrictions. NFPs following such a policy would instead immediately report restricted
capital gifts within net assets without restrictions (and operating activities) if the restrictions are
met in the same period. Consistent with the treatment of gifts of long-lived assets without donor
restrictions, NFPs also would report a transfer out of operations for the entire amount in the
same reporting period.
Non-HC NFPs currently have an option of electing a policy of implying a time restriction on
donated long-lived assets. Under such a policy, the time restriction expires over the useful life of
the donated long-lived asset. Some NFPs currently elect this policy because it allows the release
to be matched by the asset’s depreciation expense. This option would be eliminated for all NFPs
under the proposed ASU. All restrictions on long-lived assets would be released when the assets
are placed in service.
KPMG Observations
NFPs that currently report an intermediate measure of operations often report capital
transactions outside of operations. The performance indicator used by NFP businessoriented HC entities also excludes contributions of (and net assets released from donor
restrictions related to) long-lived assets. Reporting capital transactions within operations
could result in significant yearly fluctuations given their irregular nature.
In response to constituents who argued that these activities should be shown outside
operations, the FASB decided that while they would be shown within operating revenues,
unless the institution decides to sell the capital asset, a transfer out of operations also
would be shown. Therefore, these amounts would be included in the first subtotal
(operating excess (deficit) before transfers) but excluded from the operating excess
(deficit) after transfers. However, the expense (depreciation) associated with the capital
asset would continue to be reported in operations in subsequent periods over the asset’s
useful life while the revenue would be reported in operations only in the initial period.
To address this mismatch in revenues and expenses, the FASB initially considered
requiring NFPs to transfer an amount back into operations as the assets were used (to
offset the annual depreciation expense). However, this was considered too complex and
burdensome for recordkeeping purposes. The FASB ultimately decided that there should
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14
Issues In-Depth® — January 2015
be no subsequent transfers after the initial transfer out of operations.
This proposed treatment has been one of the most hotly contested decisions by the
FASB because it contradicts how many institutions view their operations. This decision
could significantly impact NFPs that receive large, sporadic capital gifts or gifts of cash to
acquire or construct capital assets and currently report these activities, including the
release from restrictions, outside of operations. This decision was discussed by the FASB
at multiple meetings and some decisions were reversed. However, the ultimate result is
that (1) these activities would be included in operating revenues and (2) transfers to move
them outside of operations would be included with other transfers made at the NFP’s
discretion. Using transfers for these activities may create additional complexity for
external users to differentiate them from other transfers that are unusual and unique to a
specific NFP.
Board Designations, Appropriations, and Similar Transfers
Under the proposed ASU, NFPs would present all operating revenues and support before
reductions for amounts designated by the governing board or its designees (i.e., management)
for use in future periods. Accordingly, NFPs would not report revenue and support net of those
amounts transferred. If an NFP’s governing board designates, appropriates, or similarly transfers
a portion of operating revenues for use in a future period, the NFP would report a transfer out of
operating activities to reflect the portion of resources no longer available. Conversely, if the
NFP’s governing board makes available certain nonoperating returns or previously transferred
amounts to support fiscal needs of current operations, the NFP would report a transfer into the
operating activities section to reflect the portion of resources made available for current-period
operations.
All designations, appropriations, and similar transfers made by the governing board or its
designees that affect current period operating activities would be shown in a separate section in
the statement of activities between the two required subtotals. The transfers would be shown in
the statement either in aggregate (transfers in separate from transfers out) or individually. If
shown in aggregate, the details would need to be disclosed in the notes. NFPs would be
required to disclose the purpose, amounts, and types of transfers (e.g., whether the transfer
occurred because of standing board policies, a one-time decision, or other reason).
KPMG Observations
Presenting Board Designations and Appropriations on a Gross Level. The
requirement to display operating and nonoperating revenues and board appropriations
gross in the statement of activities would represent a significant change from current
presentation. NFPs that currently define operations present activities that meet the
definition within operations. Those activities that do not meet the definition are shown in
nonoperating activities. For example, if an NFP has a policy to designate bequests to a
board-designated endowment, the NFP may currently report all bequests in nonoperating
activities. Under the proposed ASU, all bequests without donor restrictions would be
shown in operating activities and the board’s designation would be shown in the transfers
sections within the operating and nonoperating sections of the statement of activities.
The FASB believes that this presentation is more transparent.
Impact on Operating Performance. The decision to include designations and
appropriations by the governing board as well as its designees (i.e., management) may
allow NFPs to structure operating performance to reach desired results. The FASB’s
proposed requirement to describe the purpose, amounts, and types of transfers may help
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15
Issues In-Depth® — January 2015
alleviate this concern or at a minimum provide enough transparency for external users to
further analyze the operating results reported.
For NFP business-oriented HC entities that presently display the performance indicator
based on prescribed criteria, the ability to include internal designations in the measure of
operations could result in a significant difference in practice and move from a measure
that is now comparable to one that could be less comparable depending on entities’
designation and appropriation practices.
Transfers Not Affecting Current Period Operations. It is not clear whether the FASB’s
intent is that transfers shown in the statement of activities would include only those that
affect current period operations. While the language in the proposed ASU appears to
indicate this, some have questioned whether current period transfers of prior year
accumulated operating surpluses also would be reflected in the statement of activities.
For example, an NFP’s governing board may decide in the current period to transfer net
assets without donor restrictions to create a board-designated fund from operating
surpluses accumulated in prior periods. Including such a transfer in the current period’s
statement of activities would distort the operating results of the current period. It would
appear more appropriate to reflect the results of this transfer only in the disclosure of
board-designated net assets without donor restrictions at year-end.
Disclosure of Board-designated Net Assets. The disclosure of current period board
transfers should align with the disclosure of board-designated net assets without donor
restrictions at period end required under the proposed ASU. This information may be
combined in the same note disclosure.
Accounting Write-offs
Under the proposed ASU, the immediate write-off of goodwill and noncapitalized collections
would be reported separately from revenues, expenses, gains, and losses, but included in the
operating excess (deficit) before transfers.
Immediate Write-off of Goodwill
Current guidance specifies that if an NFP acquires another entity whose operations are expected
to be primarily supported by contributions and returns on investments, the NFP acquirer does not
recognize goodwill. Instead, the NFP acquirer recognizes a separate charge in the statement of
activities. Conceptually, this has not been considered revenue, expense, gain, or loss, but a
practical expedient to allow immediate write-off. Currently, the separate charge is required to be
presented within the performance indicator by NFP business-oriented HC entities. Acquisitions
are often non-recurring, so other NFPs that report an intermediate measure of operations have
generally reported the separate charge outside of operations.
Under the proposed ASU, the immediate write-off of goodwill upon acquisition of an entity would
be considered an operating activity for all NFPs despite the very unusual nature of the
transaction. The FASB believes that it is reasonable to assume that the purpose of acquiring the
entity is to carry out the NFP’s purpose. Although the write-off is an accounting accommodation
rather than a current period expense, it is a current period event that is generally undertaken to
further an NFP’s mission. Therefore, these transactions would be considered operating activities,
unless the acquired entity’s purpose is not directed at carrying out the acquirer’s mission.
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Issues In-Depth® — January 2015
Noncapitalized Collections
Equity transfers are
not part of the
transfers that are
required to be
shown in a separate
section in the
statement of
activities between
the two operating
subtotals. Those are
internal transfers
made by the NFP’s
board.
Similarly, NFPs that have permanent collections (e.g., works of art, historical treasures, and
similar items held by museums) may elect not to capitalize them. If so, these NFPs may currently
report the write-off (noncapitalization) outside of operations if they report an intermediate
measure of operations. However, similar to their consideration for goodwill write-offs, the FASB
believes it is reasonable to assume that collections are acquired and maintained to carry out the
NFP’s mission. Therefore, unless the collection items are acquired from net assets with donor
restrictions, these acquisitions would be reported as a separate line within operating activities
under the proposed ASU.
For noncapitalized collections acquired with resources without donor restrictions, proceeds from
the sale and from insurance recoveries of lost or destroyed collection items would be similarly
reported as operating activities, separately from revenues, expenses, gains, and losses.
Retirement Benefits
The change in net assets arising from a defined benefit plan (or a postretirement benefit plan),
but not yet reclassified as a component of net periodic pension cost (or net periodic
postretirement benefit cost), would be displayed as a separate line outside of the operating
activities section of the statement of activities. Under current U.S. GAAP, the display of the
separate line within or outside an intermediate measure of operations or the performance
indicator, if presented, is not prescribed. That said, most NFPs currently display the separate line
outside of operations, if presented.
Equity Transfers and Transactions
Equity transfers (i.e., transfers between a parent and subsidiary or entities under common
control in standalone financial statements) and equity transactions between financiallyinterrelated entities would be reported as operating activities, unless they are not for the current
period’s use in carrying out the reporting entity’s mission. The FASB believes that it is reasonable
to assume that these transactions are made to further the ability of the related NFPs to carry out
their purpose. Therefore, they should be classified as operating activities unless the resources
are not available for current-period activities. These transactions would be reported separately
from revenues, expenses, gains, and losses, but included in the operating excess (deficit) before
transfers subtotal.
Under current U.S. GAAP, equity transfers are required to be reported separately as changes in
net assets and excluded from the performance indicator by NFP business-oriented HC entities.
Equity transfers are not directly addressed within U.S. GAAP for other NFPs, and there is
diversity in presentation of these transactions (which may be referred to as grants) in or outside
of operations. Equity transactions are currently required to be reported as a separate line in the
statement of activities, but presentation in or outside of operations is at NFPs’ discretion. NFPs
often report such transactions currently outside of operations.
KPMG Observations
The inclusion of accounting write-offs, equity transfers, and equity transactions within
operations appears to conform to the two key dimensions in the definition. This could
create significant change, particularly for NFP business-oriented HC entities with equity
transfers currently reported outside of the performance indicator. These provisions of the
proposed ASU on transfers from a parent or a brother-sister entity may impact the results
of operations reported in standalone financial statements of HC and other NFP entities.
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Presentation in Statement of Activities
The proposed ASU continues to permit diversity in presenting revenues, expenses, and other
changes in net assets using a one- or two-statement approach. Additionally, NFPs would no
longer be required to report the intermediate measure of operations in a statement that also
reports the change in unrestricted net assets (or the equivalent, net assets without donor
restrictions).
Statement of activities options are included in the proposed ASU that illustrate the permitted
flexibility. While the illustrations include various NFPs, including a university, NFP businessoriented HC entity, private foundation, and charity, each presentation is not intended to be
prescriptive to the type of entity.
This Issues In-Depth also includes illustrations of the following potential statement of activities
options in Appendix 1.
 Illustration 1: Sample University – One-Statement Approach: Multi-Column, Single Year
 Illustration 2: Sample University – One-Statement Approach: Layered/ Single Column
(“Pancake”), Comparative
 Illustration 3: Sample Charity – One-Statement Approach, Multi-Column, Summarized
Comparative
 Illustration 4: Sample NFP Health Care Entity – Two-Statement Approach: Statement of
Operations and Statement of Changes in Net Assets, Comparative
KPMG Observations
The FASB decided to retain the current flexibility in presentation given the diversity of the
NFP industry and the pros and cons for each approach. Currently, the columnar approach
is often used to show totals of certain line items such as contributions and net assets
released from restrictions. However, this advantage is complicated under the new
reporting model. The proposed ASU includes an illustration where contributions with
donor restrictions are presented in the upper portion of the statement on the same line as
contributions without donor restrictions. Similarly, net assets released from restrictions
are shown in both columns in the upper portion of the statement. This allows the
organization to display total contributions and also to clearly show that net assets
released from restrictions net to zero. However, the rows for the operating subtotals only
apply to the without donor restrictions column, not the with donor restrictions or total
columns. Therefore, the with donor restrictions and total columns are blank for these
rows.
The columnar presentation in Illustrations 1 and 4 in Appendix 1 shows all activity relating
to the net assets with donor restrictions class in the lower part of the statement (after the
operating subtotals). That presentation allows subtotals to be shown for all columns but it
does not include totals for contributions or net assets released. NFPs will need to
consider the pros and cons of the presentation options and select the presentation that
works best for their circumstances.
Issues In-Depth / May 2015
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Issues In-Depth® — January 2015
Changes to the Statement of Cash Flows
Under the proposed
ASU, the proper
presentation and
classification
requirements for the
statement of cash
flows in
consolidated
financial statements
of an NFP and a
business entity
would be
determined by
whether the parent
(reporting) entity is
an NFP or a
business entity.
The statement of cash flows, which was first required for NFPs when Statement 117 was
issued, has been poorly understood and often underutilized by users. The FASB discussed
options to improve the understandability and usefulness of information reported in the statement
of cash flows. The FASB ultimately decided that requiring all NFPs to use the direct method of
reporting operating cash flows and recategorizing certain cash flows to conform to the proposed
definition of operations used in the statement of activities would achieve this goal.
Direct Method
Current guidance for all entities, including NFPs, provides two options for presenting operating
cash flows. These two options are referred to as the direct method and the indirect method.
While the FASB has encouraged use of the direct method, in practice most entities use the
indirect method of presenting operating cash flows, perhaps because it is easier to prepare.
However, the FASB’s outreach concluded that this presentation often is not useful to assess
financial performance and liquidity. Investing and financing cash flows are required to be
presented using the direct method, and these sections of the statement are often easier to
understand.
The FASB performed outreach with NFPs and similar entities that currently utilize the direct
method of reporting operating cash flows. This included public universities that follow GASB
standards, which require the direct method of reporting for operating cash flows (including the
indirect reconciliation) as well as some private universities and other NFPs that have voluntarily
elected to do the same. These entities generally reported that their governing board members
and other stakeholders found the information in the direct method to be clearer and more
insightful. They generally reported minimal additional costs that were limited primarily to first
year implementation costs to train personnel and map information from existing systems. Many
entities that report using the direct method determine the operating cash receipts and payments
indirectly (i.e., by adjusting revenue and expense amounts for the change during the period in the
related asset and liability accounts). This method, which is discussed in the Basis for Conclusions
of Statement 95, is considered a more cost-effective method for organizations without the ability
to track gross operating cash receipts and payments directly from their accounting systems. 9
Topic 230 requires entities that report operating cash flows under the direct method to provide a
reconciliation of net income (change in net assets for an NFP) to net cash flows from operating
activities (i.e., also report operating cash flows using the indirect method). 10 Under the proposed
ASU, this reconciliation would no longer be required for NFPs.
Changes to Align with the Definition of Operations in Statement of
Activities
The FASB decided to amend the classification of certain cash inflows and outflows to better align
operating cash flows with the proposed definition of operations in the statement of activities.
The amendments are listed in the following table.
9
FASB Statement No. 95, Statement of Cash Flows (subsequently codified in Topic 230), available at www.fasb.org.
10
Issues In-Depth / May 2015
FASB ASC Topic 230, Statement of Cash Flows, available at www.fasb.org.
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Issues In-Depth® — January 2015
Recategorized to Operating
Cash Flows

Cash payments at the time of purchase
or soon before or after purchase to
acquire property, plant, or equipment or
other productive assets (currently
investing)

Cash receipts from the sale of property,
plant, or equipment or other productive
assets (currently investing)

Cash payments to acquire and cash
proceeds from the sale of collection
items (currently investing)

Cash gifts restricted for acquisition of
long-lived assets, including property,
plant, and equipment, and collection
items (currently financing)
Recategorized from Operating
Cash Flows

Cash receipts of interest and dividends
on loans and investments, excluding
those made for programmatic purposes
(to investing)

Cash payments of interest on debt (to
financing)
Noncash Operating, Investing, and Financing Activities
The current requirement to disclose noncash investing and financing activities would be
expanded to include significant noncash operating activities. These are transactions or other
events that affect recognized assets and liabilities, but which do not result in cash receipts or
payments in the current period. They do, however, have the potential to have a significant effect
on future cash flows. The proposed ASU includes several examples of noncash activities, for
instance, acquiring long-lived assets by gift.
KPMG Observations
Comparison to Business Entities. While acknowledging the benefits of the direct
method, some have questioned the necessity of requiring this method for NFPs while
allowing business entities greater flexibility. The current cash flow classifications are
consistent with those in other industries following FASB standards and are familiar to
creditors, governing board members, and other users. If the requirements differ for NFPs,
this could increase complexity and create potential confusion for both sets of financial
statement users. Differences are easier to understand when they occur because of NFP
transactions that do not exist in a business entity (e.g., contributions and restricted net
assets). When the differences occur due solely to different standards for the same
transactions, they become a distraction. This would be particularly evident for the HC
industry, which includes NFP and for-profit entities that operate similarly.
Some constituents, including some FASB members, would prefer that this topic be
considered and addressed by the FASB more holistically to include all types of entities.
They would like any amendments for NFPs to be delayed until the debate is complete.
For more details, see the Alternative Views section. While the FASB has a current project
on its agenda relating to the statement of cash flows, it is directed at reducing diversity in
practice with respect to the classification of certain cash receipts and payments. The
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Issues In-Depth® — January 2015
FASB does not currently have a project on its agenda to broadly re-examine the existing
principles within Topic 230. In addition, the FASB’s research project that is evaluating
ways to improve the relevance of information presented in the performance statement of
business entities does not currently have an objective of improving the linkage between
the performance statement and the statement of cash flows.
Indirect Method Reconciliation. The reconciliation of the change in net assets to net
cash flows from operating activities, which would no longer be required, may be useful to
some financial statement users. As discussed in the Basis for Conclusions of Statement
95, this reconciliation focuses on the differences between net income (change in net
assets) and net cash flow from operating activities. This information is useful to creditors
and others who are concerned with assessing the future cash flows and trends in leads
and lags between cash flows and revenues or expenses. This reconciliation also provides
information for those users who want to identify the differences between organizations in
the measurement and recognition of noncash items that affect income.
Recategorization of Cash Flows. The FASB acknowledged that even with the above
recategorizations, the definition of operations for the statement of cash flows was not
fully (perfectly) aligned with the definition for the statement of activities. Currently, many
NFPs that rely on investment return to support operations report negative cash flows
from operations in the statement of cash flows given that investment gains are excluded
from operating cash flows. That likely may expand under the proposed ASU as a result of
moving the interest and dividends to investing activities. This was done by the FASB to
align with the definition of operations in the statement of activities, where investment
return is considered nonoperating. However, investment return may be included in the
operating excess (deficit) in the statement of activities either by virtue of being released
from a donor-restricted endowment fund or through a transfer by board action. This is just
one example of where the definition of operations is not fully aligned between the two
statements.
Noncash Operating Activities. The expansion of the disclosure requirement to include
significant noncash operating activities may not result in additional disclosures for many
NFPs. Many of the events that would result in noncash operating activities under the
proposed ASU are currently considered investing or financing activities and are disclosed
under the current requirements.
An illustrative statement of cash flows is included in Appendix 2.
Reporting of Expenses by Nature and Function
The FASB also decided that information about financial performance could be improved by
providing greater transparency about how NFPs use their resources to carry out their mission.
Currently, all NFPs are required to present expenses by function (i.e., within categories of
program services and supporting activities). Presentation of expenses by natural classification
(e.g., salaries, benefits, rent, and depreciation) is currently required only for voluntary health and
welfare entities, which are required to report a statement of functional expenses. To achieve
greater transparency, the FASB decided to require all NFPs to present operating expenses by
both nature and function.
Issues In-Depth / May 2015
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Issues In-Depth® — January 2015
NFPs would be required to report information about all expenses in one location (statement of
activities, schedule in the notes, or a separate financial statement). All operating expenses would
need to be presented by both natural expense and functional expense classification. One option
would be to provide the information in a matrix format, but no specific format is prescribed.
Nonoperating expenses (e.g., interest expense) would be reported by natural expense
classification; reporting by function would be optional.
Investment expenses that are netted against investment return would not need to be included in
the expense analysis. However, consistent with current guidance, to the extent that other
expenses are reported differently than their natural classification in the statement of activities,
they also would need to be reported in their natural expense classification (and functional
classification if it is an operating expense). This would include salaries reported in the cost of
goods sold and facility rental costs of special events reported as direct donor benefits.
KPMG Observations
Currently, some NFPs choose to report the required functional classifications of total
expenses in the notes and to display total expenses by natural classification on the face
of the financial statements (or vice versa). These NFPs, including some in the health care,
higher education, and trade association segments, believe that the natural classification
information is more informative to their financial statement users than the now-required
functional classification.
Given the proposed ASU’s requirement that all operating expenses need to be presented
by both natural and functional expense classification in the same location, this
presentation would not comply with the requirements in the proposed ASU.
However, given that the matrix format, which was previously required for voluntary health
and welfare entities, is not prescribed under the proposed ASU, some questions have
been raised about the level of detail intended by the FASB. While the matrix format is
used in the illustration included in the proposed ASU, this expanded expense information
may not be equally useful across all segments of the diverse NFP industry. It is not clear
whether including two separate columns in the same location (e.g., note disclosure), the
first showing expenses by functional classification and the second showing expenses by
natural classification, would also meet the requirements under the proposed ASU.
Voluntary Health and Welfare Entities
Voluntary health and welfare entities would be allowed the same flexibility in presentation as
other NFPs under the proposed ASU. This would remove the current challenge with the broad
definition of voluntary health and welfare entity in the FASB Master Glossary, which has created
diversity in how the statement of functional expenses requirement is applied. In an effort to
reduce the diversity, the AICPA’s Audit and Accounting Guide, Not-for-Profit Entities (the Guide)
currently recommends that all NFPs supported by the general public present a statement of
functional expenses. The Guide also states that an NFP could be presumed to be supported by
the general public if contributions, excluding government support, are 20 to 30 percent or more
of total revenue and support. The removal of the statement of functional expenses requirement
would eliminate the current application diversity.
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22
Issues In-Depth® — January 2015
Disclosures Required for Expense Allocations
The current
disclosure
requirements for
joint costs would
remain in effect,
but would be
expanded by the
proposed expense
allocation
disclosures.
Certain categories of expenses are attributable to more than one program or supporting service
expense category and therefore require allocation. Qualitative disclosure of the methods used to
allocate costs among program and supporting service categories would be required. This
additional disclosure was prompted by concerns from some stakeholders that the lack of specific
guidance on cost allocations may create diversity in functional expense ratios that are often used
as a benchmarking tool for comparison purposes across NFPs. The FASB discussed whether the
disclosures should be quantitative, qualitative, or both. Ultimately, the FASB decided that only
qualitative disclosures would be required. The proposed ASU does not prescribe the contents of
this disclosure, but does include example disclosures on cost allocation methods used.
Management and General Expenses
In an effort to increase clarity as well as promote further consistency and comparability among
NFPs, the FASB also focused on management and general activities. Current guidance provides
a list of activities that comprise management and general activities such as oversight, general
recordkeeping, disseminating information to inform the public of the NFP’s stewardship of
contributed funds, etc. This list also includes “all other management and administration except
for direct conduct of program services…, fundraising activities…, or membership development
activities.” However, this phrase has led to diversity about what costs are allocated to other
program or supporting functions versus remaining in management and general costs.
The proposed ASU refines the definition of management and general activities and includes
additional examples of the types of activities included in this category. For example, recruiting
and employee benefits activities (human resources department) and payroll were added to the
list of management and general activities. Additional implementation guidance also is included to
better depict which activities represent direct conduct and direct supervision of program or
support activities and, therefore, would be allocated to the program or support function or
functions receiving the benefit. The proposed ASU includes the following illustrative example:
Example 6: Human Resources Department Allocation
The human resources department at NFP C generally is involved in the recruitment of all
personnel of the NFP. If NFP C hired an employee to work in Program A, the human
resources department’s related costs would not be allocated to that program. Rather,
those costs would remain a component of management and general activities. This
occurs because the human resources department’s efforts to hire an employee for a
particular function are not deemed to be direct conduct or direct supervision of
programmatic activity.
KPMG Observations
Proposed Changes May Prompt a Fresh Look at Expense Allocations. These
clarifications could result in a change in practice for some NFPs that may currently
interpret direct conduct and direct supervision or the definition of program services more
broadly than the illustrations in the proposed ASU would support. The added requirement
to disclose the methods used to allocate costs also may prompt some NFPs to take a
fresh look at their expense allocations.
Considerations for Higher Education. NACUBO and others have said that there is
inconsistency throughout higher education with respect to how the same expenses may
be reported by function by one institution versus another. Some colleges and universities
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Issues In-Depth® — January 2015
have been more focused on natural classification and the functional classification has
historically received less attention. However, there has been additional focus by external
parties, including media outlets, public officials, and other stakeholders with an interest in
comparing the cost of obtaining a degree at different institutions or evaluating the
institution’s effectiveness at conducting research or other programs. This has caused
some in the higher education community to recognize the increased importance of the
functional classifications. This environment, combined with the proposed requirements to
present operating expenses by both function and nature and disclose expense allocation
methods, may prompt higher education institutions to take a fresh look at their functional
allocations.
Presentation of Investment Expenses and Return
Investment Expenses
The proposed
changes to the
reporting of
investment expenses
and return do not
relate to
programmatic
investing.
The proposed ASU eliminates the requirement to disclose the amount of total investment
expenses and the option to report these amounts within total expenses for non-programmatic
investing. All NFPs would be required to net investment expenses against non-programmatic
investment return. When internal salaries and benefits are included in the amount netted against
investment return, the total of these costs would need to be disclosed.
Under existing guidance, NFPs are permitted to present investment expenses as an expense or
to net them against investment return. While many NFPs currently elect the option to net the
expenses against the return, the requirement to disclose the total amount of netted investment
expenses presents challenges, particularly as it relates to embedded fees. Embedded fees, such
as those charged by hedge funds, mutual funds, and funds of funds, are often difficult to identify
and accumulate on a timely basis for financial reporting purposes. Therefore, the investment
expenses disclosed by NFPs currently are often not all-inclusive and may only reflect those
expenses that are readily accessible.
The AICPA’s Financial Reporting Executive Committee and other constituents asked the FASB to
reconsider the reporting requirements for investment expenses. The FASB concluded that the
costs and effort to obtain the information seemed to exceed the benefit that the information may
provide to financial statement users. This is in part because most users find the net investment
return to be the most relevant, comparable, and useful information. The FASB decided to
eliminate the requirement to disclose total investment expenses. The disclosure of netted
internal salaries and benefits was added to address concerns by some constituents about the
potential loss of relevant salary and benefit-related information with the removal of the
investment expense disclosure.
The FASB also concluded that the netted investment expenses would be limited to external
investment expenses and direct internal investment expenses incurred during the period. NFPs
would not be required, or permitted, to net indirect internal investment expenses against
investment return. The FASB also decided to remove the option to present non-programmatic
investment expenses gross, within expenses, to improve comparability among NFPs.
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Issues In-Depth® — January 2015
Gross Investment Return
NFPs would no longer be required to disclose the components of gross investment return.
Current U.S. GAAP requires disclosure of the disaggregated components of gross investment
return for the entire portfolio. There also is a separate disclosure requirement to disaggregate the
components of gross investment return relating to the endowment portfolio at a minimum
between investment income and net appreciation/depreciation. The difficulties related to
disclosing investment fees, which are often embedded in investment return, also complicate the
process of disclosing gross investment return. Therefore, the FASB decided to also remove the
existing requirements to disclose the components of gross investment return.
KPMG Observations
The changes to the presentation of investment return and expenses are more in line with
the total return concept inherent in UPMIFA and investment analysis in the current
environment.
Considerations for Private Foundations. Private foundations are subject to a 1 or 2
percent excise tax on net investment income, as defined by the Internal Revenue Code.
This excludes unrealized gains and losses. Therefore, private foundations will still need to
track, and may choose to continue to report in the financial statements, the components of
gross investment return.
Total Performance of the Other Investment Portfolio
The current requirement to disclose the total performance of the other investment portfolio
would be eliminated. Institutions of higher education are currently required to present the total
performance (investment income and realized and unrealized gains and losses) of the other
investment portfolio in the statement of activities or accompanying notes. Other investments are
defined in FASB’s investment guidance for not-for-profit entities.11 Those investments include,
among others, certain investments in real estate, mortgage notes that are not debt securities,
venture capital funds, certain partnership interests, oil and gas interests, and certain equity
securities that do not have a readily determinable fair value. The FASB decided to eliminate this
disclosure requirement consistent with the other proposed changes in this area.
11
Issues In-Depth / May 2015
FASB ASC Subtopic 958-325, Not-for-Profit Entities – Investments-Other, available at www.fasb.org.
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Issues In-Depth® — January 2015
Additional Liquidity Disclosures
NFPs would be required to define the time horizon used to manage liquidity (e.g., 30, 60, or 90
days) and disclose the following quantitative and qualitative information:
Quantitative Information
Qualitative Information
Total amount of financial assets
How liquidity is managed, for example:
Amounts that are not available to meet
cash needs within the self-defined time
horizon due to both:

Strategy for addressing entity-wide
risks that may affect liquidity, including
lines of credit;


External limits, and

Internal designations, appropriations,
and transfers made by the NFP’s
governing board.
Policy for establishing liquidity
reserves; and

Basis for determining the time horizon
used for managing liquidity
Total amount of financial liabilities due
within the same self-defined time horizon
While the required quantitative information is prescriptive, the qualitative information is not. The
proposed ASU requires that NFPs provide information about how liquidity is managed and
provides examples of what may be disclosed to achieve this requirement. However, these are
only examples and not prescribed components of the disclosure.
The existing liquidity
disclosure and
presentation
requirements for HC
and other NFPs
would also be
retained under the
proposed ASU.
One of the major objectives of the FASB’s project is to improve the quality of information users
have to assess liquidity and how NFPs manage their exposure to liquidity risk. NFP businessoriented HC entities are required to classify assets and liabilities as current and noncurrent and
separately present assets whose use is limited on the balance sheet. Other NFPs are required to
provide information about liquidity of assets and liabilities through either: (1) sequencing such
items based on liquidity; (2) classifying such items as current or noncurrent; or (3) providing
disclosures about the liquidity or maturity of such items, including restrictions on use. However,
some have observed that it is often still difficult to assess liquidity, in part because assets may
appear to be liquid based on their nature, but restrictions imposed by contracts, laws, or donor
stipulations may impact liquidity and result in these assets being unavailable to meet short-term
cash requirements.
The FASB considered requiring one or more of the following for all NFPs to improve information
about liquidity in NFP financial statements:
(1) Classified balance sheet;
(2) Separate presentation of assets whose use is limited;
(3) Liquidity information added to and integrated with notes currently required for specific assets
(e.g., investments and contributions receivable); and
(4) Quantitative and qualitative information about the liquidity of assets and near-term demands
for cash as of the reporting date and about how liquidity is managed.
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Issues In-Depth® — January 2015
The FASB considered these alternatives as well as whether existing requirements about liquidity
information in the financial statements was adequate. Some FASB members said that while
some NFPs may not be fully complying with the spirit of the existing disclosure requirements,
the current requirements, as written, were adequate. These members believed that none of the
debated options would provide additional useful information not already intended in the current
requirements. It was acknowledged that a full understanding of an entity’s management of, and
exposure to, liquidity risks may require forward-looking information and discussion that may go
beyond the boundaries of financial reporting. The FASB ultimately concluded that of the
alternatives considered, the fourth would be the most effective way to provide additional
information within the boundaries of financial reporting that would be the most useful,
understandable, and auditable for all NFPs. It was also believed that these additional disclosures
would not require new systems or impose significant costs on NFPs.
The FASB acknowledged that there may be instances where the proposed disclosures were not
needed or useful, and considered an alternative where the disclosures would be conditional (e.g.,
required only when the liquidity of the entity was not apparent through the face of the financial
statements or other disclosures or exclude NFPs that have little or no donor-restricted
resources). However, the FASB ultimately decided to require the disclosures for all NFPs.
Some of the FASB members felt that leaving the definition of the time horizon up to each NFP
would result in a lack of comparability, but they also did not believe that any specific time horizon
would apply to all NFPs. Therefore, the FASB decided not to define a single time horizon but
include disclosure of the NFP’s basis for determining a time horizon in the example qualitative
disclosures.
Effective Date and Transition
The FASB did not propose an effective date. The FASB discussed various options for an effective
date and whether there should be different effective dates based either on the size or type of
NFP or on the proposed ASU’s individual provisions. The FASB also discussed whether the
effective date should be similar to the time frame prescribed for the last significant change in
NFP financial reporting. Statements 116 and 117, which resulted in a more extensive overhaul of
financial reporting for NFPs, were effective for fiscal years beginning approximately 18 months
after the issuance of the standards for NFPs with total assets and expenses greater than $5
million and $1 million, respectively.12 Smaller NFPs were given an additional year before adoption
was required.
However, the FASB ultimately decided not to include an effective date in the proposed ASU, but
instead include specific questions soliciting comments from respondents on the effective date.
The effective date (and whether it should be the same for all NFPs, as well as whether early
adoption would be permitted) will be determined after considering constituents’ comments.
Retrospective application would be required upon initial application. In the initial period of
application, the financial statements would disclose the nature of any reclassifications or
retrospective adjustments and their effects on the change in the net asset classes for each year
or period presented. However, interim financial statements would not need to reflect the
standard’s application in the initial year of application.
12
Issues In-Depth / May 2015
FASB Statement No. 116, Accounting for Contributions Received and Contributions Made, available at www.fasb.org.
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Issues In-Depth® — January 2015
KPMG Observations
While the proposed standard’s primary impact would be on how financial information is
displayed, some NFPs could experience reclassifications between net asset classes. For
example, eliminating the option to release restrictions over an asset’s estimated useful
life would require NFPs currently using this option to immediately release any remaining
restricted net assets relating to those assets already placed in service upon
implementation of the proposed ASU.
The change in the reclassification of donor-restricted endowment deficiencies from the
current unrestricted net assets category to the proposed net assets with donor
restrictions category also would result in an immediate reclassification of net assets upon
implementation for those NFPs with underwater endowments.
Alternative Views
Both the FASB Chairman and Vice Chairman disagreed with the publication of the proposed ASU.
Both supported updating the existing presentation and disclosure standards for financial
statements of NFPs, particularly related to issues specific to or more uniquely encountered by
NFPs. However, they disagreed with the proposed requirements that go beyond specific NFP
issues and establish differences between NFPs and business entities. They specifically cited the
following examples.
Intermediate Measures of Operations. The dissenting FASB members do not support an
approach of developing comprehensive guidance for NFPs while the FASB research project
exploring essentially the same issue for business enterprises is ongoing. They believe that this
approach could establish different conclusions when an aligned approach may be best. These
FASB members believe that an important objective is to eliminate, rather than create, accounting
and reporting differences that are not justified by underlying facts and circumstances. They
believe that this piecemeal approach is likely to introduce unnecessary complexity in
understanding the differences that may be mandated by addressing the NFP reporting model
separately.
Statement of Cash Flows. The dissenting FASB members do not believe that the nature of
changes in cash, or other differences of NFPs when compared to other entities, is sufficient to
warrant a fundamentally different approach to statement of cash flows reporting. They agree
with the Board’s approach in developing Statement 117 that did not impose cash flow
requirements on NFPs that are more stringent than those for business entities. They also believe
that the changes among the three cash flow categories that were proposed to be more
compatible with the proposed definition of operations in the statement of activities would not
align these two definitions. For example, under the proposed ASU, cash payments for long-lived
assets would be reported as operating cash flows, but depreciation on fixed assets would be
reported based on whether the asset is used to promote the NFP’s mission. They also do not
support the change to report cash flows related to long-lived assets as operating rather than
investing cash flows. They expressed reservations about the cohesiveness notion that is partially
being pursued by the proposed changes.
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The dissenting FASB members also do not agree with imposing a requirement to report two
measures of operating performance, one of which reflects internally-imposed limits. In their
view, it is inappropriate to include in operating results the impact of internal and arbitrary events,
including discretionary items that are not the result of transactions with third parties, changes in
the measurement of assets and liabilities, or other outside events. They believe that this
provides NFPs with the ability to stress a U.S. GAAP measure of operating performance that
they select and choose to report. They agreed that internally-imposed limits are, or can be,
significant, but believe that they should be reported in the notes rather than on the face of the
financial statements.
Responding to the Proposed ASU
The proposed ASU includes the following main sections:
(1) Summary and Questions for Respondents
(2) Amendments to the FASB Accounting Standards Codification
(3) Background Information, Basis for Conclusions, and Alternative Views
The Summary outlines the main provisions and how they differ from current U.S. GAAP. The
Background Information, Basis for Conclusions, and Alternative Views section also will help
readers of the proposed ASU to better understand the considerations the FASB discussed prior
to making the decisions incorporated in the proposed ASU. This section includes alternative
views expressed by some FASB members about certain aspects of the proposed ASU. Some of
the amendments stimulated extensive discussion and debate not only by NAC members and
other constituents but also by FASB staff and board members. As a result, the votes on the
individual decisions by the FASB members were not always unanimous and as further discussed
in the Alternative Views section, the final vote to approve the proposed ASU also was not
unanimous.
The proposed ASU primarily includes amendments to Topics 958 and 954 of the FASB
Codification. In addition, there are conforming amendments to some related Topics, most
significantly Topic 230. The second section of the proposed ASU includes a marked-up version of
the FASB Codification for the applicable topics, including the amended paragraphs as well as
related paragraphs to provide context. Given the pervasive changes to Topic 958, this section is
extensive.
The Questions for Respondents section includes a comprehensive list of specific questions.
While the FASB invites comment on all matters discussed in the proposed ASU, it decided to
include very specific questions to solicit the views of respondents, particularly in those areas
where there was extensive discussion and debate.
We encourage those interested in financial reporting by NFPs to consider providing comments to
the FASB before the comment deadline. Commenting on the proposed ASU will help ensure that
your views are considered before the final ASU is issued. The FASB requests comments from
both those who agree as well as those who disagree with the proposed amendments. Given the
number of proposed changes in the proposed ASU, it is likely that respondents may agree with
some but disagree with others. This should be made clear in your response.
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Issues In-Depth® — January 2015
Appendix 1: Illustrative Statements of Activities
The illustrative statements of activities assume that Topic 606, Revenue from Contracts with
Customers, has not been adopted.
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Issues In-Depth / May 2015
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Issues In-Depth / May 2015
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Issues In-Depth® — January 2015
Appendix 2: Illustrative Statement of Cash Flows
Issues In-Depth / May 2015
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Contact us: This is a publication of KPMG’s Department of Professional Practice 212-909-5600
Contributing authors: Lisa C. Hinkson, Amanda E. Nelson, Maricela Frausto, and Jared S. Silver
Contributing reviewers: David R. Gagnon, National Audit Leader, Higher Education & Other Not-for-Profits, and
Marc B. Scher, National Audit Leader, Healthcare
Earlier editions are available at: http://www.kpmg-institutes.com
Legal–The descriptive and summary statements in this newsletter are not intended to be a substitute for the
potential requirements of the proposed standard or any other potential or applicable requirements of the
accounting literature or SEC regulations. Companies applying U.S. GAAP or filing with the SEC should apply the
texts of the relevant laws, regulations, and accounting requirements, consider their particular circumstances, and
consult their accounting and legal advisors. Defining Issues® is a registered trademark of KPMG LLP.
Issues In-Depth / May 2015
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