ASU 2016-14 – Presentation of Operating Cash Flows

Posted by Christina K. Bell, CPA

In August 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2016-14 (ASU 2016-14) to make improvements to the communication of information on not-for-profit financial statements. ASU 2016-14 is effective for not-for-profit organizations with annual reporting periods beginning after December 15, 2017 (calendar year 2018 or fiscal year 2019). ASU 2016-14 focuses on the five main areas listed below, but this blog will provide information and implementation examples solely related to the presentation of operating cash flows.

 

Five main areas of focus in ASU 2016-14:

  1. Net asset classes
  2. Investment return
  3. Functional expense reporting
  4. Liquidity and availability of resources
  5. Presentation of operating cash flows

Nonprofits currently have the option to prepare their statement of cash flows utilizing either the direct method or indirect method. The two methods differ in the presentation of operating cash flows; however, each method produces the same amount of net cash derived from operating activities. Below is an example of both the direct method and the indirect method as currently required.

DIRECT METHOD
CASH FLOWS FROM OPERATING ACTIVITIES RECONCILIATION OF CHANGE IN NET ASSETS TO NET CASH FROM OPERATING ACTIVITIES
   Cash Received from                   Operations $2,456,623    Change in Net Assets $(97,821)
   Cash Paid to Suppliers and       Employees (2,351,660)    Adjustments to Reconcile Change     in Net Assets to Net Cash from         operating Activities
     NET CASH FROM                     OPERATING ACTIVITIES 104,963      Depreciation 269,584
CASH FLOWS FROM INVESTING ACTIVITIES      Net Realized and Unrealized             Gains on Investments (22,060)
   Net Withdrawals from                 Investments 1,065,496      Contributions Restricted for               Capital (60,582)
   Purchase of Fixed Assets (242,688)      Changes in Assets and Liabilities
     NET CASH FROM                     INVESTING ACTIVITIES 822,808           Contributions and Grants                    Receivable (125,862)
CASH FLOWS FROM FINANCING ACTIVITIES           Prepaid Expenses 26,615
Repayments of Notes Payable (50,000)           Accounts Payable and                        Accrued Expenses 59,108
NET CHANGE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH 877,771           Deferred Revenue 55,981
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH – Beginning of Year 402,114 NET CASH FROM OPERATING ACTIVITIES $104,963
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH – End of Year $1,279,885

 

 

INDIRECT METHOD
     Change in Net Assets $  (97,821)
     Adjustments to Reconcile Change in Net Assets to Net Cash from operating Activities
          Depreciation 269,584
          Net Realized and Unrealized Gains on Investments (22,060)
          Contributions Restricted for Capital (60,582)
          Changes in Assets and Liabilities
               Contributions and Grants Receivable (125,862)
               Prepaid Expenses 26,615
               Accounts Payable and Accrued Expenses 59,108
               Deferred Revenue 55,981
NET CASH FROM OPERATING ACTIVITIES 104,963
CASH FLOWS FROM INVESTING ACTIVITIES
     Net Withdrawals from Investments 1,065,496
     Purchase of Fixed Assets (242,688)
          NET CASH FROM INVESTING ACTIVITIES 822,808
CASH FLOWS FROM FINANCING ACTIVITIES  
     Repayments of Notes Payable (50,000)
NET CHANGE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH 877,771
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH – Beginning of Year 402,114
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH – End of Year $1,279,885

 

ASU 2016-14 continues to extend the option of preparing the statement of cash flows utilizing either the direct method or indirect method; however, it eliminates the requirement to present a reconciliation of change in net assets to net cash from operating activities if utilizing the direct method.

CHART

DIRECT METHOD
CASH FLOWS FROM OPERATING ACTIVITIES RECONCILIATION OF CHANGE IN NET ASSETS TO NET CASH FROM OPERATING ACTIVITIES
   Cash Received from                   Operations $2,456,623    Change in Net Assets $(97,821)
   Cash Paid to Suppliers and       Employees (2,351,660)    Adjustments to Reconcile Change     in Net Assets to Net Cash from         operating Activities
     NET CASH FROM                     OPERATING ACTIVITIES 104,963      Depreciation 269,584
CASH FLOWS FROM INVESTING ACTIVITIES      Net Realized and Unrealized             Gains on Investments (22,060)
   Net Withdrawals from                 Investments 1,065,496      Contributions Restricted for               Capital (60,582)
   Purchase of Fixed Assets (242,688)      Changes in Assets and Liabilities
     NET CASH FROM                     INVESTING ACTIVITIES 822,808           Contributions and Grants                    Receivable (125,862)
CASH FLOWS FROM FINANCING ACTIVITIES           Prepaid Expenses 26,615
Repayments of Notes Payable (50,000)           Accounts Payable and                        Accrued Expenses 59,108
NET CHANGE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH 877,771           Deferred Revenue 55,981
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH – Beginning of Year 402,114 NET CASH FROM OPERATING ACTIVITIES $104,963
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH – End of Year $1,279,885

 

By eliminating the reconciliation, FASB hopes to encourage nonprofits to elect the direct method; however, a reconciliation may still be reported if a nonprofit prefers to present one.

There are certain key considerations an organization should consider when determining what cash flow method to utilize and if utilizing the direct method, if a reconciliation of the change in net assets to net cash from operating activities should be disclosed. Those key considerations are as follows:

  • The indirect method can be easily prepared using information derived from existing account balances and accounting reports.
  • The direct method discloses operating cash receipts and payments, which is useful information to all financial statement stakeholders as it provides a more accurate picture of an organization’s cash flow situation as opposed to the indirect method. As such, it is preferred by FASB.
  • Presenting the reconciliation of change in net assets to net cash from operating activities when utilizing the direct method can be beneficial to organizations with large reconciling items such as investment gains/losses, depreciation, and/or contributions restricted for long-term purposes.

Please contact your CPA or BLS Professional with any questions at 302.225.0600 to request additional guidance regarding cash flow presentations and the implementation of ASU 2016-14.

 

Photo by Sergey Norin (License)

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