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Not-for-Profit Proposal Targeted for 2015 Release

The FASB’s research staff is ready to begin writing a proposal that will establish financial reporting requirements for not-for-profit organizations.Releasing the proposal will be a major milestone for a project that started in 2009.

After agreeing to some changes recommended by its Not-for-Profit Advisory Committee, the FASB on October 8, 2014, asked its research staff to begin drafting a proposal to establish financial reporting requirements specifically designed for not-for-profit organizations.

The proposal is scheduled to go through an external review, after which the FASB plans to discuss the costs and benefits of the proposed changes and decide if it’s ready to release the proposal for a round of public comment.It’s expected that the proposed amendments may be released in early 2015.

Releasing the proposal will be a major milestone for a project that dates to 2009, when the FASB formed the advisory panel to help it with financial reporting issues specific to foundations, charities, religious organizations, and similar groups.

Before instructing the staff to begin drafting the proposal, board members had to revise their approach to large donations and gifts of property to match some suggestions the advisory panel made at its September 4-5 meeting.Several panel members were concerned that the FASB was considering an approach for large gifts that would conflict with the way many, if not most, not-for-profits manage their operations.

The FASB decided that not-for-profits should report gifts of buildings and other long-term assets as operating revenue.If the asset is used instead of sold, its value would be transferred out of operating income.The FASB won’t permit transfers back into operating income in subsequent periods.

The FASB also decided that gifts of cash earmarked by the donor for buying or building long-term assets would initially be reported as revenues that increase net assets with donor restrictions and reported outside of operations.Once the not-for-profit begins to use the asset, unrestricted assets would be increased by the asset’s value, and restricted assets would be decreased by the same amount.The amount would also be reported as a transfer from operating activities to non-operating activities, and there would be no transfers back into operations in subsequent periods.The FASB said this approach matches the treatment of gifts of long-lived assets.

The board had a lengthy debate about the amount of flexibility a not-for-profit organization’s management should have in deciding the value and timing of the transfer.Vice Chairman James Kroeker said of the staff suggestion: “I can define transfers however I want, so it’s optional.”Although Kroeker acknowledged that the purpose of allowing management leeway in defining transfers was to allow it to “tell your story,” he added that under the staff’s suggestion, “you can tell any story you want, and there’ll be no comparability.”

“One of the things that we’re struggling with is that we’re writing a standard for a wide variety of not-for-profit entities, and they manage themselves differently,” responded FASB member Lawrence Smith.

To address the concern expressed by Kroeker, the board decided to require a not-for-profit organization to present all transfers in a separate, discrete section of its operating income statement and a subtotal of operating revenues and expenses before and after the transfers.At a minimum, a not-for-profit has to separate the aggregate amounts of the transfers into and out of operating activities.Unless the organization chooses to display all transfers as discrete line items on the face of the statement of activities, it would need to disclose the details of the aggregate transfers in a footnote to the financial statement.Not-for-profits would have to describe the transfers, why they were done, their total value and whether they were the result of a standing policy or the result of one-time decision.

Several members of the FASB staff said the Not-for-Profit Advisory Committee might oppose the reporting and disclosure requirements for the transfers, because some not-for-profits temporarily set aside cash in a “quasi endowment” without accounting for it as a transfer.Smith said the proposal could include an explanation that the board doesn’t believe the transfer requirements should include cash management decisions.

“I think we can adequately explain that we’re not marrying this to how you manage your cash,” Smith said.

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