FASB ASU 2016-14: Statement of Cash Flow
ASU 2016-14 continues to permit nonprofits to present operating cash flows using either the direct or indirect method. The ASU, however, no longer requires a reconciliation of net cash provided by (used in) operating activities to the change in net assets if a nonprofit elects to present cash flows using the direct method. By eliminating the reconciliation, which was considered to be an impediment, the Financial Accounting Standards Board (FASB) intends to encourage nonprofits to elect the direct method. A reconciliation from the direct method to the indirect method may still be reported if a nonprofit prefers to present one.
Continuing to allow nonprofits to elect the direct or indirect method retains the flexibility and freedom to choose the method that best serves the informational needs of a nonprofit’s users — creditors, donors, grantors, and others — in a way that strikes a balance in improving relevance and understandability of information without imposing undue costs.
Direct Method of Cash Flows
The direct method of cash flows presents cash flows from operating activities in line items such as cash received from contributions, cash received from service recipients, cash received from other income, cash paid for grants, cash paid for interest, cash paid to employees, and cash paid for other activities. In essence, the direct method line items present where cash comes from and where it goes.
In deciding to use the direct method, your organization may consider the following factors:
- Users can easily derive the same cash flows from operating activities using the indirect method when given a comparative statement of financial position and a comparative statement of activity; therefore, the indirect method adds no additional information to the financial statements.
- The investing activity and financing activity sections of the indirect method are prepared using the direct cash method; therefore, it may make intuitive sense to prepare the operating activity section on the same basis.
- FASB encourages reporting cash flows from operating activities directly by showing major classes of operating cash receipts and payments, as this may be more useful to a broad range of users.
- Many organizations do not look at their statement of cash flows closely. Converting from indirect to direct method is likely only beneficial for organizations with multiple large reconciling items such as realized and unrealized gains or losses, depreciation, and contributions restricted for long-term purposes, among others.
- The changes in the ASU do not materially change how nonprofits record underlying transactions. However, if an organization changes the presentation of the statement of cash flows, the impact and benefits to the users of the financial statements should be understood.
- The majority of time spent to change from the indirect to direct method would be building a template to use in future years. This could be accomplished by identifying the noncash impact to statement of activity line items (A/R, A/P, accrued salaries, etc.).
- ASU 2014-16 removes the main impediment to using the direct method by eliminating the requirement to also disclose the indirect method. Careful planning by management will remove the impediment of easily generating the direct method information.
If you are considering changing your statement of cash flows from the indirect method to the direct method, we will be happy to assist in planning the change. Please contact us to learn more.