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Not-for-Profit Groups May be Required to Give More Detail about Expenses

December 17, 2013

As part of its effort to overhaul how museums, charities, and other not-for-profit groups draw up their financial statements, the FASB needs to decide whether it should require these groups to give more insight into the costs of salaries, rent, professional fees, and fund-raising. Proponents say such a breakdown, called “natural” expense reporting, would give more transparency into the financial health of these organizations.

The FASB is considering whether it should require charities, universities, and other not-for-profit organizations to give more detailed breakdowns of their expenses, including employee salaries.

The board plans to meet on December 18, 2013, to discuss whether to require what the standard-setter calls “natural” reporting of organization expenses, meaning a categorization of expenses based on nature. Such expense categories could include rent, professional fees, fund-raising, and overhead, among others.

SFAS No. 117, Financial Statements of Not-for-Profit Organizations, (Topic 958), currently requires this breakdown for voluntary health and welfare entities—health and social welfare organizations that receive revenue primarily via contributions from the general public, but not from government sources.

All other not-for-profit organizations are encouraged to report natural expenses, but only required to report information about expenses based on their function, such as major programs or services and major classes of supporting services. A university, for example, would break down expenses for the cost of educating students and for the cost of doing academic research.

A majority of FASB members at a December 11 education session said they supported the idea of requiring a breakdown of expenses by nature, particularly for information about salaries.

“Let’s say a soup kitchen has an annual budget of $1 million,” FASB member Lawrence Smith said. “I think users might look at that set of financial statements differently if they found out the salaries were $750,000 and supplies or whatever were $250,000. I think there is some important information, particularly to donors.”

“One of the things I’m interested in is how much they pay in salaries to their people, especially to those I’m contributing to,” FASB member Thomas Linsmeier said. “Are there very large salaries for different functions and different activities? And that’s why the natural breakdown is so important.”

The board earlier this month held a conference call with its Not-for-Profit Advisory Committee, and the majority of its members supported the idea of requiring natural expense breakdowns, saying it would add more transparency to groups’ financial statements.

“I was very surprised by the unanimity of everyone on that call; they all said this was not a big deal to require,” FASB member Marc Siegel said.

The FASB does not make decisions at education sessions, but the discussion prepares the board for formal action.

The education session and the scheduled December 18 discussion are part of the board’s broader effort to improve financial reporting for not-for-profit organizations. The FASB in recent months has discussed the best financial statement presentation for these groups, moved to overhaul how they identify assets with donor restrictions and those that are free to use immediately, and have started preliminary talks on how organizations should convey their liquidity, or access to cash.

The FASB aims to release a proposal for public comment by mid-2014.