In August of 2016, the Financial Accounting Standards Board (FASB) issued new rules for nonprofit entities that will take effect for periods beginning after December 15, 2017. FASB’s goals for implementing these new changes is to provide better information to donors, grantmakers, creditors, and those who read nonprofit financial statements. One major area improved upon with this update is the Statement of Cash Flows. The newly released guidance continues to allow nonprofits the freedom to choose whether the entity presents the statement of cash flows using either the direct method or the indirect method.
The direct method is the method of presenting cash flows that derives the net cash provided by operating activities from the components of operating cash receipts and payments. The direct method utilizes the theory of cash in and cash out for its preparation. This is compared to the indirect method, which derives the net cash provided by operating activities by adjusting operating activities for revenue and expense items not resulting from cash transactions. Primarily because it is easier to prepare, most entities opt to use the indirect method to present their Statement of Cash Flows. In the past, if an entity chose to use the direct method for presentation, a separate schedule was required. The purpose of the schedule was to reconcile the net change in net assets to net cash flows from operating activities.
To encourage the use of the direct method of reporting, FASB will no longer require the reconciliation of the direct method to the indirect method. FASB has anticipated this change will provide a more useful statement of cash flows and a reduction in the costs to prepare financial statements. Although these changes will not materially affect how a nonprofit entity will account for underlying transactions, it is imperative that if an entity changes how they present the Statement of Cash Flows, they understand its impact to the users.
For more information on these changes or any questions regarding our firm’s nonprofit services, please feel free to contact a member of our team. Look for another update soon regarding additional changes to nonprofit reporting.