Most of us are creatures of habit. I am one. When I go to Denny’s, I order the same thing every time. I don’t even look at the menu because I already know what I will be ordering (a half-order of nachos with a coke). The waiters and waitresses—even the hostesses and managers—all know my “usual.” I am definitely a creature of habit.
For many of the not-for-profit organizations (NPOs) that I work with, it is very easy to become creatures of habit with the financial statements and to simply present them in the same manner as was presented in the previous year. Certainly, there are benefits of comparability between years, but like I said, creatures of habit.
With the issuance of FASB ASU 2016-14 Not-for-Profit Entities: Presentation of Financial Statements in Not-for-Profit Entities in August 2016, I think that it is worth considering whether or not NPOs should continue to be creatures of habit regarding the statement of cash flows.
Historically, the statement of cash flows for many NPOs has been presented using what is known as the “indirect method.” Essentially, for the net change in cash from operating activities, the change in net assets is initially assumed to result entirely from cash coming in from all revenue sources and cash going out for all expenses. Adjustments are then shown for non-cash revenues and expenses and then for changes in the statement of financial position accounts for cash-to-accrual adjustments. For NPOs that choose to present the statement of cash flows using the “direct method,” a reconciliation to the indirect method is required, therefore resulting in the indirect method still being presented on those statements of cash flows even when the direct method is used. As a result, it becomes easier and more efficient to simply present the statement of cash flows using the indirect method. After all, if this presentation is required regardless whether the direct or indirect method is used, why take the extra time to also present the statement of cash flows using the direct method?
One of the provisions of ASU 2016-14 (effective for fiscal periods beginning after December 15, 2017, with early adoption permitted), removes the requirement for this reconciliation to be performed between the direct method and the indirect method. Using the direct method, the net change in cash from operating activities is presented by showing the amount of cash received during the year from various revenue sources and the amount of cash spent during the year for various expenses, such as and including personnel-related costs and amounts paid to vendors. Available resources—most significantly, cash—is often the most important consideration for many of the Boards of Directors for the NPOs that I work with. The budgets for many of these NPOs are prepared on a cash basis. Cash is easy to understand—how much do I have, how much did I receive, and how much did I spend? Using the direct method for the statement of cash flows may make it easier for these NPOs and their Boards of Directors to understand these sources and uses of cash during the year in ways that are not as easy to understand upon first glance using the indirect method. So the question, now, for these NPOs and their Boards of Directors to consider is this: Do you continue to be creatures of habit, or does the direct method represent a more useful way for you to present the statement of cash flows?