Statement of Cash Flows for Not-for-Profit Entities

Statement of Cash Flows for Not-for-Profit Entities

Not-for-profit entities that prepare their financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) are required to include a statement of cash flows in their financial statements.

The professional standards governing the statement of cash flows for not-for-profit entities and for-profit entities are the same; however, there are certain transactions that only apply to not-for-profit entities. These transactions include:

  • Receipt of Restricted Donations
  • Investment Income from Endowment Funds
  • Restricted Cash
  • Agency Transactions
  • Noncash Investing and Financing Activities
  • Collections
  • Sale of Marketable Securities

Below, you’ll find guidance on how to report these transactions that are unique to not-for-profit entities.

Receipt of Restricted Donations

Many not-for-profit entities receive donations for which the donor has placed a stipulation that they must be used for long-term purposes, such as the purchase of property and equipment or for endowment funds. These cash receipts are to be reported as financing activities in the statement of cash flows. Also, when using the indirect method of reporting cash flows, cash flows from operating activities will need to be reduced by the amount of donation income received with long-term purpose restrictions since this income is included in the change in net assets, which appears as the first line item in cash flows from operating activities.

Investment Income from Endowment Funds

Some not-for-profit entities have endowment funds, which have donor-imposed restrictions that restrict the use of the income to long-term purposes. Just like the initial receipt of the restricted contribution, the investment income earned on these endowment funds, which is restricted for long-term purposes, must be reported as a financing activity. Also, when using the indirect method of reporting cash flows, cash flows from operating activities will need to be reduced by the amount of investment income received with long-term purpose restrictions, since the investment income is included in the change in net assets, which is an operating activity.

Restricted Cash

When a not-for-profit entity has cash balances that are subject to donor restrictions that limit its use to investment in long-lived assets, these cash balances should be reported on the statement of financial position as restricted cash. Currently, changes in these types of restricted cash accounts should be reported as investing activities. However, Accounting Standards Update (“ASU”) 2016-18, which is effective for years beginning after December 15, 2018, for nonpublic entities, changes the presentation of changes in restricted cash. This ASU will require entities to show the changes in total cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. Therefore, after the implementation of this ASU, the net change in restricted cash and cash equivalents will no longer be reported as an investing activity, and instead, the restricted cash and cash equivalent balances will be combined with the beginning and ending cash and cash equivalent balances on the statement of cash flows. In addition, when cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item within the statement of financial position, this ASU requires the entity to present either on the face of the statement of cash flows or in the notes to the financial statement, a listing of each line item on the statement of financial position with a total that agrees to the ending cash, cash equivalent, restricted cash and restricted cash equivalent balance on the statement of cash flows. This disclosure may be provided in either a narrative or a tabular format.

Agency Transactions

An agency transaction is a type of exchange transaction whereby the not-for-profit entity receives funds that it must pass onto a third party. The receipt of these funds are not reported on the statement of actives, but instead, are reported as a liability on the statement of financial position. When the funds are transferred to the third party, the payment is recorded as a reduction in the liability account. The receipt and disbursement of agency transactions are reported as an operating activity on the statement of cash flows and can be reported either at net or gross when using the indirect method of reporting cash flows.

Noncash Investing and Financing Activities

Noncash investing and financing activities that are unique to not-for-profit entities include contributions of (1) property and equipment, (2) beneficial interest in trusts and (3) marketable securities. Just like all other noncash investing and financing activities, these activities, unless nearly immediate converted to cash, are not reported as operating, investing or financing activities, and instead, are reported in a separate disclosure either on the face of the statement of cash flows or in the notes to the financial statements.

Collections

Cash flows from the purchase, sale or insurance recoveries of capitalized and noncapitalized collection items are reported as investing actives on the statement of cash flows. In addition, for noncapitalized collections when using the indirect method of reporting cash flows, these cash inflows would be reported as a reduction in operating activities and the cash outflows would be reported as an increase in operating activities because the receipt and disbursement of these cash flows are included in the change in net assets, which is included in operating activities.

Sale of Marketable Securities

Normally, the sale of marketable securities is treated as an investing activity. However, when a not-for-profit entity receives a donation of marketable securities and the not-for-profit entity converts the securities nearly immediately to cash, the proceeds from the sale of these securities should be treated as an operating activity, unless the donor has restricted the use of the proceeds from the sale of the securities to a long-term purpose, in which case the proceeds would be treated as a financing activity, see Receipt of Restricted Donations above. If however, donated marketable securities are not converted nearly immediately to cash, then the sale of these securities would be reported as an investing activity, whether or not the donation was received with donor-imposed long-term purpose restrictions.

As shown, there are multiple transactions that require special attention during the preparation of a not-for-profit’s statement of cash flows. Understanding the correct way to report these transactions on the statement of cash flows can help ensure your organization’s financial position is depicted accurately.

Author:Lisa Galinsky, CPA, CVA | [email protected]

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